Partnership Law [2003] SLC 192(APPENDIX_A) (Report) (November 2003)

Partnerships Bill

CONTENTS

PART 1

INTRODUCTION

1 Meaning of partnership agreement and partnership 2 Bodies excluded from scope of this Act

3 Liability of partners

4 Partnership agreements 5 Default partnership rules

PART 2

GENERAL PARTNERSHIPS

Carrying on of partnership business and capacity 6 The carrying on of the partnership business

7 Capacity of partnership

8 Incapacity to commit offences (England and Wales)

Good faith and disclosure 9 Overriding duty of good faith

10 Duties of disclosure on forming or joining partnership

Partners: share of profits, management of the business etc. 11 Partner's share of profits and losses

12 Remuneration, expenses, personal liabilities etc. 13 Capital contribution etc. by partner

14 Management etc. of partnership business and affairs 15 Accounting and partnership records

Power of partners to bind partnership

16 Partnership bound by acts of partners carrying on business in usual way

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Partnership property

17 Partnership property

18 Rules for identifying partnership property 19 Land acquired out of partnership profits

Execution of documents 20 Execution of deeds (England and Wales)

21 Reduction of certain documents signed by partnerships (Scotland)

Vicarious liability of partnership for wrongs

22 Vicarious liability of partnership for loss or injury caused by partner

Secondary liability of partners 23 Unlimited liability of partners

24 Secondary nature of partner's liability

25 Partner's secondary liability: supplementary

Liability of non-partners by holding out 26 Non-partners who are liable by "holding out"

Changes in partners 27 Admission of new partners

28 How persons cease to be partners

29 Ceasing to be partner on ground of insolvency 30 Power to resign

31 Power to expel partner

32 Realisation of former partner's share (other than on winding up)

33 Liability of former partner for obligations incurred while a partner 34 Former partners: indemnity and contribution, and return of property

35 Restrictions on liability of former partners or employees by "holding out" 36 Position of assignees etc. of partner's share

37 Position where partner's share is arrested in execution (Scotland)

Break up of partnerships 38 Events which break up a partnership

39 Effects of break up

40 Restriction on ceasing to be a partner on or after break up

Changes in partners and break up of partnerships: supplementary 41 Publicity for departure of partner or break up of partnership

42 Protection for property acquired after break up

Winding up and dissolution of partnership 43 Winding up by partners

44 Distribution of partnership's assets on winding up 45 Dissolution

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Court's powers in relation to partnerships 46 Order charging partner's share (England and Wales) 47 Order removing partner or breaking up partnership 48 Section 47: interim orders

49 Order breaking up partnership on application of Secretary of State 50 Order appointing liquidator

51 Order appointing provisional liquidator

52 Order for repayment of premium on premature break up of partnership 53 Order for benefit of former partner

PART 3

LIMITED PARTNERSHIPS

Introduction 54 Limited and general partners

Limited partners and limited liability 55 Restricted role of limited partner

56 Limited liability of limited partner

57 Limited partner who has unlimited liability

Other modifications of Part 2 for limited partnerships 58 General application of Act to limited partnerships

59 Rights and duties of the partners etc.

60 Changes in partners

61 Break up and winding up of limited partnership

Registered office and names

62 Registered office

63 Name of limited partnership

64 Improper use of "limited partnership" etc.

65 Information to be provided on partnership documents

Registration 66 Application for registration

67 Registration and registration certificate

68 Registration of changes, deregistration and other matters 69 Offences of providing false information

Supplementary 70 Offences by bodies corporate

71 Evidence

72 Interpretation of Part 3

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Partnerships Bill

PART 4

SPECIAL LIMITED PARTNERSHIPS

73 Special limited partnerships (England and Wales) PART 5

SUPPLEMENTARY

Disclosure of information about partners etc. 74 Disclosure of names and addresses of partners

75 Business Names Act 1985

Interpretation

76 Interpretation

Final provisions 77 Regulations and orders etc.

78 Consequential amendments

79 Transitional provisions

80 Short title, commencement and extent

Schedule 1 - Whether persons are carrying on business together Schedule 2 - Partner's secondary liability: limitation and prescription Schedule 3 - Orders under section 47: supplementary provisions Schedule 4 - Winding up by liquidator

Part 1 - General

Part 2 - Powers of liquidator exercisable with approval or sanction Part 3 - Powers of liquidator exercisable without approval or sanction Part 4 - Liquidator's powers in relation to sequestration of estates of

partners and partnership (Scotland) Schedule 5 - Functions of provisional liquidator Schedule 6 - Permitted activities for limited partners Schedule 7 - Registration of changes and corrections Schedule 8 - Deregistration

Schedule 9 - Administration of the registration system Schedule 10 - Special limited partnerships

Schedule 11 - Amendments of the Business Names Act 1985

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Partnerships Bill

Part 1 - Introduction

DRAFT

OF A

BILL

Make provision about partnerships; and for connected purposes.

BE IT ENACTED by the Queen's most Excellent Majesty, by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as follows:-

PART 1

INTRODUCTION

1	Meaning of partnership agreement and partnership

(1) A partnership agreement is an agreement between two or more persons for

carrying on a business together with the object of making a profit.

(2) For the purposes of this Act, a partnership is an association formed when two or more persons start to carry on a business together under a partnership agreement.

(3) A partnership is a legal person but not a body corporate.

(4)This is subject to Part4 (provision for special limited partnerships, which are

not legal persons).

(5) A partnership is-

(a) a general partnership, or

(b) a limited partnership registered under section 67.

(6)InthisAct"business"includes every trade,profession and occupation.

(7) Schedule 1 provides examples of circumstances which do not by themselves establish that persons are carrying on a business together.

2	Bodies excluded from scope of this Act

None of the following is a partnership for the purposes of this Act-

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EXPLANATORY NOTES

INTRODUCTION

Clause 1

Subsection (1) introduces the concept of the partnership agreement. This subsection and subsection (2) make it clear that without this agreement between the partners, a business venture is not a partnership to which the law of partnerships applies. This agreement may be explicit or implicit (see clause 76(2)). This reflects the existing law.
Subsection (2) governs the moment that a partnership comes into being. It is intended to reflect the existing law on this point under the Partnership Act 1890 (the "1890 Act"), as settled by the House of Lords in Khan v Miah [2000] 1 WLR 2123. See the report, paragraphs 4.16 - 4.24.
Subsection (3) provides that a partnership is a separate legal person. This is an innovation in the law of England and Wales. It is already the case under the 1890 Act in Scotland. For the background to and reasons for this change to the law in England and Wales, see the report, paragraphs 5.5 - 5.40. A partnership is not governed by the common law of corporations. It is a sui generis legal person and its characteristics will be determined by (a) the draft Bill, (b) the partnership agreement (which may in certain respects vary and supplement provisions of the draft Bill) and (c) the rules of common law and equity so far as consistent with the draft Bill. See the report, paragraphs 5.38 - 5.39 and 5.40 (2).
Subsection (5) introduces the concept of the limited partnership. Under the current law, limited partnerships are dealt with in a separate piece of legislation modifying and supplementing the 1890 Act (the Limited Partnerships Act 1907 (the "1907 Act")). In the draft Bill, the statutory provisions on limited partnerships are integrated with those on general partnerships. See the report, Parts XV - XVIII.
Subsection (6) provides that a partnership may be created whatever the nature of the business. This reproduces the existing law. See the report, paragraphs 4.33 - 4.35.
Subsection (7) introduces Schedule 1 which provides guidance on whether, on a given set of facts, people are in business together. It does this by setting out examples of arrangements that do not, by themselves, establish that people are in business together. It is broadly intended to reproduce the existing law under section 2 of the 1890 Act in a clear and unambiguous form. See the report, paragraphs 4.48 - 4.53.
All new general partnerships (and all existing general partnerships after the transitional period) will have separate legal personality under the draft Bill. It will, however, be possible for a new (or existing) limited partnership to elect to remain without separate legal personality. This option, and the law which applies if it is exercised, is governed by Part 4 of the draft Bill and referred to in subsection (4). It is expected that this option will be exercised only by sophisticated financial vehicles. For the background to this recommendation on limited partnerships, see the report, Part XIX.

Clause 2

This clause ensures that business vehicles other than a partnership constituted under Scots law or English law are not governed by the draft Bill. This reproduces and clarifies the law under the 1890 Act (section 1(2)). See the report, paragraph 4.40.

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				Part 1 - Introduction
		(a)	a limited liability partnership incorporated under the Limited Liability
			Partnerships Act 2000 (c. 12);
		(b)	any other body corporate (wherever incorporated);
		(c)	a partnership constituted under the law of a country or territory
			outside Great Britain;		5
		(d)	any other association or body formed under any other enactment,
			letters patent or Royal Charter or under the law of a country or territory
			outside the United Kingdom.
3		Liability of partners
	(1)	Each of the partners in a general partnership has unlimited liability (as to			10
		which, see section 23).
	(2)	A limited partnership must have-
		(a)	one or more general partners each of whom has unlimited liability, and
		(b)	one or more limited partners each of whom has limited liability (as to
			which, see section 56) so long as he complies with section 55 (restricted		15
			role of limited partners).
4		Partnership agreements
		A partnership agreement may be varied in accordance with its terms or-
		(a)	before formation of the partnership, with the agreement of all proposed
			partners;		20
		(b)	after formation, with the agreement of all existing partners.
5		Default partnership rules
	(1)	In this Act "default rule" means a rule that applies in relation to a partnership
		if the point dealt with in the rule is not dealt with in the partnership agreement.
	(2)	If a default rule applies in relation to a partnership, it is to be treated as if it			25
		were a term of the partnership agreement.
	(3)	The application of a default rule in relation to a partnership may be modified
		or excluded-
		(a)	in accordance with the terms of the partnership agreement, or
		(b)	if all the partners agree.		30
			PART 2
			GENERAL PARTNERSHIPS
			Carrying on of partnership business and capacity
6		The carrying on of the partnership business
	(1)	The function of the partners is to carry on the partnership business.			35
	(2)	The main functions of the partnership are-
		(a)	to enter into contracts and own or hold property for the purposes of the
			partnership business, and

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EXPLANATORY NOTES

Clause 3

A central feature of the law of partnerships is that the partners are personally liable in full for liabilities of the partnership. Subsection (1) introduces this important concept, which is fleshed out in clause 23. Subsection (2) sets out the different position of limited partners in a limited partnership. See the report, paragraphs 6.57 and 6.59(1).

Clause 4

This clause provides how the partnership agreement (as defined by clause 1(1)) may be altered. See the report, paragraphs 4.54 - 4.55, 18.3 - 18.4 and 18.7.

Clause 5

The partnership agreement may contain detailed rules governing the relationship between the partners. But it may not. Indeed, a partnership agreement may not be express at all: it may be inferred from the fact that a business is being carried on (see note on clause 1 above). If a partnership agreement is silent on a matter (for example, how profits are to be shared) and the partners do not agree, how is this to be resolved? The answer may be provided by a "default rule" contained in the draft Bill. The draft Bill contains a number of these rules. This clause introduces the concept and explains how they work. A "default rule" applies unless the partners have agreed to deal with the subject matter of the rule in some other way.

The purpose of subsection (2) is to ensure that the breach by a partner of a default rule gives the partnership and other partners the same remedies as the breach of an identically worded term of the partnership agreement. Subsection (3) sets out the way in which partners may modify or exclude a default rule. See the report, paragraphs 4.56 - 4.58.

GENERAL PARTNERSHIPS

Carrying on of partnership business and capacity

Clause 6

The introduction of separate legal personality for partnerships does not alter the fact that the partners own and manage the business and remain fully liable for its debts.

The separate legal personality of a partnership under the draft Bill is designed to clarify and simplify the legal analysis of its activities. In particular, separate legal personality provides a simple structure for a partnership's contractual relationships, and for its ownership of property. It also gives legal reality to the economic fact that the partnership which exists after a change in membership is (unless otherwise agreed) the same partnership which existed before. These features of separate legal personality are the subject of subsection (2). See the report, paragraphs 4.25 - 4.32.

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Part 2 - General partnerships

(b) subject to the partnership agreement, to provide continuity for the partnership business despite a change in the partners.

(3) The partners are agents of the partnership (but not of each other).

(4) It is a default rule that a change in the nature of the partnership business

(whether or not it involves a change in the partnership agreement) requires the

agreement of all the partners.

7		Capacity of partnership
	(1)	A partnership's capacity as a legal person is unlimited.
	(2)	A partnership may, in particular, sue and be sued in its name.
	(3)	Subsection (1) is subject to subsection (4) and section 8.			10
	(4)	A partnership is not capable of engaging a partner as an employee.
S		Incapacity to commit offences (England and Wales)
		Except so far as is provided by or under any enactment (whether expressly or
		by implication) a partnership is not capable of committing an offence.
			Good faith and disclosure		15
9		Overriding duty of good faith
	(1)	A partner must act in good faith towards-
		(a)	the partnership, and
		(b)	each of the other partners,
		in relation to any matter affecting the partnership.			20
	(2)	In particular, a partner must-
		(a)	keep each of the other partners fully informed of partnership matters;
		(b)	account to the partnership for any secret profit;
		(c)	account to the partnership for any profits of a competing business.
	(3)	The mutual rights and duties of the partners, and the mutual rights and duties			25
		of the partnership and the partners, (whether arising under this Act or the
		partnership agreement) are subject to the duty imposed by subsection (1).
	(4)	"Partnership matters" means matters affecting the partnership of which the
		other partners would reasonably expect to be kept informed.
	(5)	"Secret profit" means any benefit which the partner derives, without the			30
		agreement of all the other partners, from-
		(a)	a transaction affecting the partnership, or
		(b)	the use by him of partnership property	or trust property or the
			partnership name or business connection.
	(6)	"Competing business" means a business carried on by him, without the			35
		agreement of all the other partners, which competes with and is of the same
		nature as the partnership business.

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EXPLANATORY NOTES

Under the existing law in England and Wales, the relationship between partners is one of mutual agency. In Scots law, a partner is the agent of the partnership. As mutual agency is not consistent with separate legal personality, the draft Bill provides that partners are agents of the partnership entity and not of each other. Principles of agency law will apply. T his is the effect of subsection (3). See the report, paragraphs 6.10 - 6.22(1).
Subsection (4) provides that the nature of the partnership business can (by default) be changed only with unanimous agreement. See the report, paragraphs 10.29 and 10.30(5).

Clause 7

Subsection (1) ensures that, generally, no-one can challenge the validity of an act of a partnership on the grounds that the act was not within its capacity. In other words, the introduction into the law of partnerships of separate legal personality will not bring with it the doctrine of ultra vires which once applied in the field of company law. See the report, paragraphs 4.41 - 4.42,9.23 - 9.49 and 9.51 (1) - (2).
Subsection (3) introduces two provisos to this statement of a partnership's unlimited capacity. First, a partnership is not capable of employing a partner (subsection (4)). This is to ensure that employment law does not apply to the relationship between the partnership and the partners. See the report, paragraphs 13.41-13.43. The second proviso relates to the application of the criminal law to partnerships (on which see clause 8).
Subsection (2) ensures that the partnership entity can be a party to litigation. The existing rules in England and Wales already adopt an approach to partnership litigation which is similar to an entity approach. However, in Scots law, there is a need to modernise the existing rules which, oddly, are less oriented towards an entity approach. See the report, paragraphs 7.4 - 7.9, 7.20 and 7.22(1).

Clause 8

This clause gives a clear rule in England and Wales that a partnership is not capable of committing an offence unless it is provided otherwise (expressly or by implication) in any enactment. The application of the criminal law to partnerships in England and Wales may need to be reviewed as an independent exercise in due course. See the report paragraphs 4.43 - 4.47.

21.

In Scotland, where partnership already has partnership is capable of committing certain therefore apply in Scotland.

a form of separate legal personality, a criminal offences. This clause does not

Good faith and disclosure Clause 9

This clause states the fundamental duty of good faith which partners owe to each other and adapts that to the introduction of separate personality of the partnership.
Subsection (1) states the fundamental duty and makes clear that a partner owes that duty both to the partnership and to each of the other partners. See the report, paragraphs 11.67 - 11.70.

Subsections (2), (4), (5) and (6) restate the specific fiduciary duties which were stated in sections 28 - 30 of the 1890 Act. The Bill does not attempt further to codify fiduciary duties of a partner but leaves it to the courts to develop this area of law.
Subsection (3) makes it clear that while partners are free to shape by agreement amongst themselves the precise duties which they undertake to each other and to the firm, they may not exclude the duty of good faith. Partners must show good faith in the performance of the duties which they undertake. See the report, paragraphs 11.29 - 11.32.

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			Part 2 - General partnerships
10		Duties of disclosure on forming or joining partnership
	(1)	If two or more persons are about to form a partnership, each prospective
		partner must disclose to the other prospective partners anything known to him
		which a prudent prospective partner would reasonably expect to be disclosed
		in order to decide whether or not to form the partnership.			5
	(2)	Subsections (3) and (4) apply if a person ("the prospective partner") is about to
		become a partner in an existing partnership.
	(3)	The partners must disclose to the prospective partner anything known to them
		which a prudent prospective partner would reasonably expect to be disclosed
		in order to decide whether or not to become a partner.			10
	(4)	The prospective partner must disclose to the partners anything known to him
		which prudent partners would reasonably expect to be disclosed in order to
		decide whether or not to admit him as a partner.
	(5)	The duties under this section may be waived (in whole or in part) by agreement
		between the prospective partners (or between the prospective partner and the			15
		partners) .
	(6)	The only remedies for breach of a duty under this section are those provided
		by section 47 and Schedule 3.
	(7)	For the purposes of this section, anything which a person reasonably ought to
		know is to be treated as known to him.			20
			Partners: share of profits, management of the business etc.
11		Partner's share of profits and losses
	(1)	This section contains a default rule.
	(2)	The partners are entitled to share any partnership profits, and are liable to bear
		any partnership losses, in equal proportions.			25
	(3)	"Partnership profits", in relation to a partner, means profits of the partnership
		business which accrue while he is a partner.
	(4)	"Partnership losses", in relation to a partner, means losses of the partnership
		business incurred while he is a partner.
12		Remuneration, expenses, personal liabilities etc.			30
	(1)	This section contains default rules.
	(2)	A partner is not entitled to remuneration from the partnership for acting in the
		partnership business.
	(3)	But a partner is entitled to be indemnified by the partnership in respect of a
		payment made by him-			35
		(a)	in the proper conduct of the partnership business or in connection with
			anything necessarily done for the preservation of the partnership
			business or property, or
		(b)	to discharge the whole or a part of his personal	liability for a
			partnership obligation or in reasonable settlement	of an alleged	40
			personal liability for a partnership obligation.

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EXPLANATORY NOTES

Clause 10

This clause imposes a duty of disclosure on those about to form a partnership. If a partnership already exists, it imposes a similar duty on the existing partners and on the prospective partner. Note that the duty of good faith in clause 9 (which applies only between current partners and the partnership) does not apply in these situations.

The duty in this clause is objective in two senses. First, the information which must be disclosed is that which a prudent hypothetical partner (or prospective partner) would reasonably expect to receive in the circumstances (subsections (1), (3) and (4)). Secondly, someone who unjustifiably fails to discover (and hence disclose) such a fact is as much in breach of the duty as the person who discovers and fails to disclose it (subsection (7)). Subsection (5) provides that, if parties are happy to enter into partnership without this safeguard, then they can waive it.

There is some doubt about the existence and nature of a duty of disclosure under the existing law. See the report, paragraphs 11.35 - 11.40. Subsection (6) refers forward to the remedies for breach of this duty.

Partners: share ofprofits, m anagem ent of the business etc.

Clause 11

When a partnership makes money, or loses it, how are the profits to be shared out, or the losses borne? This clause sets out a default rule that profits and losses of the partnership are to be shared equally. This reproduces the existing law. See the report, paragraphs 10.24, 10.25 and 10.30(1).

Clause 12

In what circumstances may a partner claim money from the partnership, or from fellow partners? This clause sets out some default rules to answer this question.

Subsection (2) provides that a partner is not entitled to claim remuneration unless the partners agree otherwise. T he default position is that a partner gets an equal share of the profits or bears an equal share of the losses of the partnership (see clause 11). See the report, paragraphs 10.29 and 10.30(5).

Subsection (3) sets out the circumstances in which a partner may obtain reimbursement from the partnership for money paid from personal funds. Paragraph (a) deals with expenses incurred for the benefit of the partnership. T his is the existing law. Paragraph (b) deals separately with payments which a partner makes to discharge his personal liability for debts, or other obligations, owed by the partnership. "Personal liability for a partnership obligation" is defined in subsection (8). It also clarifies that a partner is entitled to indemnity when, acting in good faith and reasonably, he pays a claim against the partnership which turns out not to be due. See the report, paragraphs 6.60 - 6.65(1)(a) and (t), 10.29 and 10.30(6).

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(4) The indemnity does not affect any claim which the partnership or another partner may have against the partner.

(5) If the partnership does not pay the indemnity (or part of it), the partner is entitled to contribution from any other liable partner on the same basis as if the

amount unpaid were a debt for which he and each other liable partner were co-

guarantors in the same proportions as they would be liable to bear any partnership losses.

(6) "Other liable partner" means a partner of his who-

(a) in the case of his liability (or alleged liability) for a partnership

obligation, was a partner when the payment was made and was liable

with him for the obligation (or, in the case of settlement of an alleged liability, would have been liable if the alleged liability had been established), or

(b) otherwise, was a partner when the payment was made.

(7)If the partnership wrongly fails to pay to a partner any other amount for which

it is liable to account to him, he is entitled to contribution from the other partners in the same proportions as if the amount were a partnership loss.

(8) "Personal liability for a partnership obligation" includes-

(a) a liability under subsection (5) to make a contribution to a partner in

respect of the partnership obligation to indemnify him under

subsection (3),

(b) a liability under subsection (7) to make a contribution to a partner in respect of the partnership obligation to account to him for an amount,

(d)a liability under section 34(4) to indemnify (or make acontribution to)

a former partner in respect of the partnership obligation to indemnify him under section 34(2).

13	Capital contribution etc. by partner

(1) This section contains default rules.

(2)No partner is entitled, or may be required, to-

(a) contribute capital to the partnership, or

(b) vary the amount of his capital contribution to the partnership, unless he and all the other partners agree.

(3) If a partner contributes capital to the partnership, he is not entitled to interest

(4) If a partner makes an advance to the partnership beyond the amount (if any) of the capital he has agreed to contribute, he is entitled to receive interest from the partnership at the prescribed rate from the date of the advance.

(5) "The prescribed rate" has the meaning given by section 76(1).

Management etc. of partnership business and affairs

(1) This section contains default rules.

(2) A partner is entitled to take part in the management of the partnership business and affairs.

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EXPLANATORY NOTES

Subsection (4) ensures that this right to reimbursement does not relieve a partner of liability for damages for any wrong committed to a partnership or other partner. See the report, paragraphs 6.60 and 6.65(1)(b).

A partnership may be obliged to account to a partner for an amount as a result of the operation of subsection (3) or otherwise (for example, under the partnership agreement). If the partnership does not pay, what rights does that partner have against other partners? The answer is provided by subsections (5)-(7). These give an unpaid partner personal rights to contribution from other partners. Subsection (7) deals with a partner's right to contribution in relation to, for example, a loan to a partnership or undrawn profits. See the report, paragraphs 10.30(6),6.60 - 6.64 and 6.65(1)(c)-(e).

Note that these subsections, like the clause as a whole, are default rules. Contrast the (mandatory) rules on secondary liability of partners for partnership obligations owed to third parties in clause 23. It is not impossible that a partner might have a claim against other partners under the mandatory rules in clause 23 rather than the default rules under this clause. This will be the case if the amount owed by the partnership to the partner is not an internal partnership matter but is owed to the person in a capacity other than as a partner, for example, a partner may be owed an amount due to damage to that partner's car caused by the driving of a partnership employee in the course of his employment.

T he rules in this clause broadly reflect the existing law as adapted for separate legal personality.

Clause 13

Suppose a partner puts money (or other assets) into the partnership. How is that to be treated, as between the partners? This clause provides some default rules to answer this question.

Subsection (2) provides that, in order for a contribution to be classified as capital or for a capital contribution to be varied, this must be agreed by all the partners. That agreement need not be express (see clause 76(2)). The following subsections set out some consequences of this classification. Subsection (3) provides that the partner is not entitled to interest on a con tribu tion classified as capital. Subsection (4) provides that a partner is, on the other hand, entitled to interest on other amounts he contributes. The amount of in terest is linked to the base rate. T his last point is a change in the law. 0 therwise, these rules reflect, with clarifications, the existing law. See the report, paragraphs 10.26, 10.28 and 10.30(2), (4) and (5).

Note that other consequences may flow from the classification of an amount as "capital".

For example, it may affect a partner's share of the profits (if the partnership departs from the default rule in clause 11 and shares profits in proportion to capital contributed). It may also affect a partner's share of the partnership's assets on a winding up (see the default rule in clause 44).

Clause 14

This clause provides default rules about management and how differences of opinion between partners are to be resolved.

Subsection (2) ensures that the views of each partner count. This reflects the existing law under the 1890 Act (section 24(5)).

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				Part 2 - General partnerships
	(3)	Differences about ordinary matters connected with the partnership business or
		affairs may be decided by a majority of the partners.
	(4)	But differences about other matters connected with the partnership business or
		affairs must be decided by all the partners.
	(5)	The question whether a partnership should take legal or arbitral proceedings				5
		against, or defend such proceedings brought by, another person (whether or
		not a partner) is an ordinary matter.
	(6)	The partnership agreement cannot be varied under subsection (3) or (4) (see
		section 4).
15		Accounting and partnership records				10
	(1)	This section contains default rules.
	(2)	A partner must-
		(a)	ensure that proper accounting records are kept of transactions affecting
			the partnership in which he is involved and of which the other partners
			would reasonably expect such records to be kept, and			15
		(b)	ensure that the records are made available, on request, to the
			partnership or any other partner.
	(3)	A partner must cooperate with any person who is keeping partnership records
		or drawing up partnership accounts on behalf of the partnership.
				Power of partners to bind partnership		20
16		Partnership bound by acts of partners carrying on business in usual way
	(1)	A partnership is bound by anything done by a partner for carrying on in the
		usual way business of the kind carried on by the partners.
	(2)	But the partnership is not bound if-
		(a)	the partner has no authority to do the thing		on behalf of the	25
			partnership, and
		(b)	the person with whom the partner is dealing-
			(i)	has notice that the partner has no authority, or
			(ii)	does not know or believe him to be a partner in the partnership.
	(3)	This section is subject to section 20 (execution of deeds (England and Wales)).				30
				Partnership property
17		Partnership property
	(1)	In this Act "partnership property" -
		(a)	in England and Wales, means property to which the partnership is
			beneficially entitled (whether or not the property is held in the			35
			partnership name), and
		(b)	in Scotland, does not include property held by the partnership in trust.
	(2)	The Bodies Corporate (Joint Tenancy) Act 1899 (c. 20) applies in relation to the
		acquisition, holding and devolution of real or personal property in joint

352

EXPLANATORY NOTES

The effect of subsections (3) and (4) is that the resolution of a difference of opinion will depend on whether the issue is an "ordinary matter". If it is, the majority can impose its will on the rest (subsection (3)). If not, unanimity is required (subsection (4)). This reflects the existing law under the 1890 Act (section 24(8)).
The question of whether an issue is an "ordinary matter" will depend on the facts of the case. What may be an ordinary matter for one partnership may not be for another. And what may be ordinary for a partnership at one time may not be so later. So, in general, the draft Bill, like the 1890 Act, does not give further guidance on this issue. An exception has been made to this general approach in subsection (5) which provides that a difference of opinion over whether a partnership should engage in legal proceedings (litigation or arbitration), whether as claimant/pursuer or defendant/defender, will (by default) be decided by majority. This is already the case in Scotland; in England and Wales there is doubt over the current position. See also clause 6(4) which provides that the nature of the partnership business can (by default) be changed only with unanimous agreement. See the report, paragraphs 10.27, 10.29, 10.30(3) and (5).
Note that the effect of a difference of opinion between partners over whether to admit someone to partnership is dealt with separately in clause 27 and variation of the partnership agreement is dealt with in clause 4.

Clause 15

It is part of the duty of good faith that partners should keep each other fully informed about partnership matters (clause 9(2)(a)). This clause provides a default rule in line with that duty on the retention of accounting information and the compilation of accounts.
The term "partnership records" in subsection (3) is used rather than the term "partnership books" which appears in section 24(9) of the 1890 Act. The new term is more appropriate in the era of electronic records. The clause does not, unlike section 24(9), require the records to be kept in a particular place. Otherwise, this default rule, read with clause 9(2)(a), is intended to reproduce, with clarifications, the law currently governed by section 24(9) and section 28 of the 1890 Act. See the report, paragraphs 11.33 - 11.34.

Power of partners to bind partnership

Clause 16

A partnership may confer express authority on a partner to do certain things on its behalf.

A partner who acts within the terms of such authority will bind the partnership by his acts. But what is the position if the partnership does not expressly confer authority on a partner? This clause gives the answer by providing that the ordinary authority of a partner to bind the firm extends to anything done for carrying on in the usual way business of the kind carried on by the partners.

Moreover, any limitation of that authority will not affect a person dealing with a partner unless he has notice of the partner's lack of authority or does not think he is a partner. This is the effect of subsection (2) and reflects the existing law (see the 1890 Act, section 5). For reasons which we discuss in the report we have not reproduced other provisions of the 1890 Act relating to the agency of a partner. See the report, paragraphs 6.10 - 6.22.

Partnership property

Clause 17

The introduction of separate legal personality into English law enables a partnership to own property in its own right. As a result, the definition of partnership property in this clause is shorter and simpler than that in section 20(1) of the 1890 Act. The definitions are different in EnglandfWales and Scotland because of differences in property and trust law; there is no difference in policy. See the report, paragraphs 9.81 - 9.83. Subsection (2) ensures that a partnership can be a joint tenant in English law. See the report, paragraphs 9.50 and 9.51(6).

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Partnerships Bill			7
Part 2 - General partnerships
		tenancy by a partnership as it applies in relation to the acquisition, holding and
		devolution of such property by a body corporate.
18		Rules for identifying partnership property
	(1)	If property is acquired out of partnership property, it is to be regarded (unless
		the contrary is shown) as having been acquired on behalf of the partnership.		5
	(2)	Property which is held in the name of one or more of the partners but which
		has been-
		(a)	acquired on behalf of the partnership, or
		(b)	contributed to the partnership as capital,
		is to be regarded as held by the partner or partners in trust for the partnership.		10
	(3)	This section is subject to section 19.
19		Land acquired out of partnership profits
	(1)	This section applies in relation to land ("the original land") which-
		(a)	is co-owned by persons who are partners as to profits made by its use,
			but	15
		(b)	is not partnership property.
	(2)	If, out of those profits, the partners acquire land which is to be used in the same
		way as the original land, the acquired land-
		(a)	is to be regarded as co-owned by the partners in the same manner as the
			original land was co-owned by them at the date of the acquisition, but	20
		(b)	is not to be regarded as partnership property.
	(3)	Subsection (2) is subject to any agreement to the contrary.
	(4)	Land is "co-owned" by the partners if it is owned by them-
		(a)	as joint tenants or tenants in common, or
		(b)	in Scotland, as joint property or common property.	25
			Execution of documents
20		Execution of deeds (England and Wales)
	(1)	A document is validly executed by a partnership as a deed for the purposes of
		section 1 (2) (b) of the Law of Property (Miscellaneous Provisions) Act 1989
		(c. 34) only if it is-		30
		(a)	executed in accordance with subsection (2), and
		(b)	delivered as a deed.
	(2)	A document is executed in accordance with this subsection if it is-
		(a)	signed by at least two partners, each of whom has authority to execute
			the document as a deed on behalf of the partnership, and	35
		(b)	expressed (in whatever form of words) to be executed by the
			partnership.
	(3)	A document is to be presumed to be delivered for the purposes of subsection
		(1)(b) upon its being executed in accordance with subsection (2), unless a
		contrary intention is shown.		40

354

EXPLANATORY NOTES

Clause 18

In a particular case, there may be doubt over whether an asset is the private property of a partner (or group of partners) or of the partnership. Subsection (1) provides a rebuttable factual presumption about property bought with partnership money or acquired by barter with partnership property which will remove some such doubts. See the report, paragraphs 9.25 - 9.49, 9.51 (1),9.73 and 9.80(2).

T he purpose of subsection (2) is to clarify the legal analysis which applies to property held on behalf of the partnership (either as a result of the operation of the presumption in subsection (1) or otherwise). The effect of the subsection is that it is held on trust for the partnership. See the report, paragraphs 9.25,9.51(2),9.77 and 9.80(1).

The rules in this clause are designed to produce the same outcomes as in the existing law of partnerships.

Clause 19

This clause provides a different presumption from that in subsection (1) of the previous clause in a very narrow range of circumstances. It is likely to apply principally in agricultural partnerships. It reflects the existing law in section 20(3) of the 1890 Act. See the report, paragraphs 9.79 and 9.80(3).

Ex ecution of docum ents

Clause 20

This clause applies only to England and Wales and provides rules to govern the way in which the partnership may execu te a deed on its own behalf. Under the current law there are a number of legal and practical problems associated with the execution of partnership deeds. For example, all partners have to sign a deed, or be present when it is signed, for it to be binding on the whole partnership. The introduction of separate legal personality enables these to be removed. Under this clause, a partnership deed generally requires the signature of at least two partners (not agents of the partners or other agents of the partnership). See the report, paragraphs 9.94 - 9.96 and 9.98(1) - (5).

Clause 20 contains several exceptions to the basic rule that at least two partners must sign a deed for it to be executed on behalf of the partnership. If a partnership is being wound up and there is only one partner then that partner will be able to execute a deed (subsection (4)). In addition, where a limited partnership has only one general partner that partner will also be able to validly execute a deed (subsection (5)). Where there are no partners left during the winding up (for example, there were only 2 partners and both have died) a liquidator could be appointed and could execute a deed (Schedule 4, paragraph 24).

56.

Subsection (3) contains a rebuttable executed. An equivalent provision for Companies Act 1985.

presumption of delivery once a deed has been companies is contained in section 36A(5) of the

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8			Partnerships Bill
			Part 2 - General partnerships
	(4)	If-
		(a)	a partnership is being wound up under section 43 (winding up by
			partners), and
		(b)	there is only one partner remaining in the partnership,
		subsection (2)(a) is to be taken to be satisfied if the document is signed by the		5
		partner (whether or not he has authority to execute the document).
	(5)	If a limited partnership has only one general partner, subsection (2)(a) is to be
		taken to be satisfied if-
		(a)	the document is signed by the general partner, and
		(b)	he has authority to execute the document as a deed on behalf of the	10
			partnership.
	(6)	In the case of a partner which is not an individual, a document is signed by a
		partner for the purposes of this section if it is signed by an individual who has
		authority to sign on behalf of the partner.
	(7)	In favour of a purchaser, a document which has been signed by two or more		15
		persons, each of whom purports to sign-
		(a)	as a partner, or
		(b)	as an individual who has authority to sign on behalf of a partner which
			is not an individual,
		is to be taken to have been signed in accordance with subsection (2)(a).		20
	(8)	"Purchaser" means a purchaser in good faith for valuable consideration and
		includes a lessee, mortgagee or other person who for valuable consideration
		acquires an interest in property.
21		Reduction of certain documents signed by partnerships (Scotland)
		A document which is signed by a partnership in accordance with paragraph		25
		2(1) (subscription of documents by partnerships) of Schedule 2 to the
		Requirements of Writing (Scotland) Act 1995 (c. 7) by virtue of having been
		signed on the partnership's behalf by a partner is reducible if the partner had
		no authority or apparent authority to sign the document on the partnership's
		behalf.		30
			Vicarious liability of partnership for wrongs
22		Vicarious liability of partnership for loss or injury caused by partner
		A partnership is liable for loss or injury to another person caused by a partner's
		wrongful act or omission if the act or omission-
		(a)	occurs in the ordinary course of the partnership business, or	35
		(b)	is authorised by the partnership.
			Secondary liability of partners
23		Unlimited liability of partners
	(1)	Each partner who has unlimited liability is personally liable for the whole
		amount of any partnership obligation incurred while he is a partner.		40

356

EXPLANATORY NOTES

57.	Subsection(6)provides for signing where bodies corporate or partnerships are partners.

The authority of a partner to execute a deed does not fall within the ordinary authority conferred by clause 16(1). A partner must specifically have authority to execute a deed in order for that partner to enter into a deed that binds the partnership (clause 20(2)).

However, an exception to this rule has been made for the purchaser in good faith and for valuable consideration. The third party purchaser will have no way of knowing whether a partner has the authority required to execute a deed. Under subsections (7) and (8) such a purchaser will still be able to rely on the deed, even if the partners did not have the requisite authority to execute a deed. An equivalent provision for companies is contained in section 36A(6) of the Companies Act 1985.

Clause 21

In Scots law the rules for formal validity of documents are in the Requirements of Writing (Scotland) Act 1995. This clause clarifies the relationship between the 1995 Act and the rules as to the agency of a partner so that formal validity is not affected by a partner's lack of authority to sign the document, but the partnership or interested party will be able to seek the reduction of such a document if the partner had no authority to sign it on behalf of the partnership. See the report, paragraphs 9.97 and 9.98(7).

Vicarious liab ility of partn ership for wrongs

Clause 22

This clause sets out when a partnership is liable for the wrongful acts or omissions of its partners.

The partnership will be liable for resulting loss or injury caused to another if a partner's wrongful act or omission occurred in the ordinary course of the partnership business or was authorised by the partnership. A partnership may be vicariously liable under this clause to a partner, which is not the case under the equivalent provision of the 1890 Act (section 10). The expression "wrongful act or omission" is intended to have the same broad meaning as the House of Lords gave to the same phrase in section lOin Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48, [2003] 1 All ER 97, [2002] 3 WLR 1913 and [2003] 1 Lloyd's Rep 65. See the report, paragraphs 6.28 - 6.46.

Secondary liability of partners

Clause 23

Clause 3(1) introduced the concept of unlimited personal liability of partners for partnership obligations. This clause explains what that means.

Subsection (1) establishes which partners have unlimited personal liability for a partnership obligation: they are those who were partners when the partnership obligation was "incurred". Subsection (7) states when a partnership obligation is incurred in the case of a breach of duty in tort (delict), a breach of trust or a breach of fiduciary duty. Note that a partnership obligation which results from a breach of duty in contract will be taken to have arisen at the moment the contract was entered into; subsection (7) does not mention this because it is the effect of the general law. See the report, paragraphs 6.54 - 6.59(2), 6.73 6.80 and 6.88(2).

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Partnerships Bill

Part 2 - General partnerships

(2) But a partner ("A") is not personally liable under subsection (1) for a partnership obligation owed to a partner or former partner ("B") if-

(a) the partnership agreement (including any default rules), or

(b) another agreement to which A and B are parties,

makes provision about whether or not B is entitled to indemnity or

contribution from A in respect of the obligation.

(3) Subsection (1) does not affect the liability of the partnership for the partnership obligation.

(4) If a partner pays an amount to discharge the whole or a part of his personal

liability for a partnership obligation, the partnership obligation is discharged

to the extent of the amount paid.

(5) If a partnership obligation is-

(a) discharged in whole or in part (whether or not as a result of subsection (4)), or

(b)otherwise reduced or extinguished,

the personal liability of any partner for that partnership obligation is discharged or reduced or extinguished to the same extent.

(6) In this Act "partnership obligation" includes-

(a) any partnership debt, and

(b)any other liability of the partnership.

(7) For the purposes of this Act, a partnership obligation which results from (a) breach of a duty in tort or delict (including quasi-delict),

(b) breach of trust, or

is to be treated as having been in curred at the time of the act or omission that

gave rise to the breach.

Secondary nature of partner's liability

A partner may not in any proceedings be held personally liable under section 23(1) for a partnership obligation unless-

(a) there has been a judgment, decree or arbitral award against the partnership establishing the amount of the partnership obligation in the same or earlier proceedings,

(b) the court has ordered the partnership to make a payment (or interim payment) in respect of the partnership obligation, or

(c) in Scotland, the partnership obligation is constituted in a document registered for execution in the Books of Council and Session or the sheriff court books.

25	Partner's secondary liability: supplementary

(1) Rules of court may make provision-

(a)preventing a partner from defending, or

(b) restricting the extent to which, or the way in which, a partner may defend,

proceedings in respect of his personal liability for a partnership obligation if he has had an opportunity to participate in related proceedings.

358

EXPLANATORY NOTES

Subsection (2) ensures that these rules do not interfere with the rules which partnerships are free to determine for themselves on the position as between partners and former partners. Default rules on these issues are in clause 12(5) and 12(7) (current partners) and clause 34(4) (former partners). See the report, paragraphs 6.62 and 6.65(2).

Subsections (3) - (5) establish the relationship between the partnership obligation (defined by subsection (6)) and the personal liability of the partners (as imposed by subsection (1)). The effect of these subsections is that the liabilities of the partners and the partnership are, so far as the third party is concerned, joint and several. See the report, paragraphs 6.58 and 6.59(2).

This clause is intended to replicate the effect of the existing law of partnerships on this issue, in the context of separate legal personality and in the absence of mutual agency, while making clear that the joint and several liability of the partners and partnership as against a third party leaves partners free to determine their liability amongst themselves by agreement.

Clause 24

This clause sets out an important procedural protection enjoyed by partners in relation to their personal liability for partnership obligations. A third party may proceed against a partner (on the basis of a personal liability for a partnership debt) only (i) in the same proceedings as he obtains or after he has obtained a judgment/decree or arbitral award against the partnership (paragraph (a)); (ii) where there is some other court order requiring it to pay (paragraph (b)); (iii) (in Scotland) when the partnership obligation has been constituted in a document registered for execution (paragraph (c)).

Note that it is not sufficient for the third party to establish liability only: the judgment/decree, or order, or registered document, must specify the amount payable by the partnership. Note, however, that the third party is not obliged to attempt to extract any payment from the partnership before doing so against the partner.

The purpose of the clause is to ensure that a partner is not required by the court to pay a partnership obligation until the amount of the partnership obligation has been established against the partnership. Normally, this will allow all those potentially liable for the claim to put their case. But note that the claimant/pursuer is not required to sue all or indeed any of the partners when establishing his claim against the partnership. T his position is similar to that achieved in England and Wales in the absence of separate legal personality under rules of court (Order 81 of the Rules of the Supreme Court). See the report, paragraphs 7.21 7.22(2),7.55 - 7.62 and 7.64(1) and (2).

Clause 25

71. This clause contains further provisions on a partner's personal liability under clause 23(1).

Subsections (1) and (2) give a power to make rules of court limiting a partner's right to defend a claim in respect of his personal liability for a partnership obligation. Such a rule might be introduced, for example, to prevent a partner from raising points which had already been fully aired and decided in the action against the partnership in which he had an opportunity to participate. See the report, paragraphs 7.25 - 7.26.

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Partnerships Bill Part 2 - General partnerships

(2) "Related proceedings" means earlier proceedings in which there has been a judgment or decree against the partnership establishing the existence or amount of the partnership obligation.

(3) Schedule 2 makes provision about the periods of limitation and prescription

applicable to apartner's personal liability for partnership obligations.

(4) A judgment, decree or arbitral award against a partnership in respect of a partnership obligation is not enforceable, by way of execution, diligence or otherwise, against the property of a partner.

Liability of non-partners by holding out

Non-partners who are liable by "holding out"

(1) If-

(a) a person ("A") who is not a partner in a partnership represents himself, or knowingly allows himself to be represented, as one, and

(b) a person ("B") deals with the partnership in reliance on the

representation,

A is personally liable for the whole amount of any partnership obligation incurred to B as a result.

(2) Subsection (1) also applies if A-

(a) is a partner at the time the representation is made or communicated to

B,but

(b) is no longer a partner at the time B deals with the partnership in reliance on the representation.

(3) Subsection (1) applies-

(a) even if A does not know that the representation has been made or

communicated to B in particular, and

(b) whether the representation is made or communicated in writing, by conduct or otherwise.

(4) Sections 23(2) to (5), 24 and 25 apply in relation to A's personal liability under subsection (1) as if it were a personal liability of a partner under section 23(1).

(5)A is entitled to be indemnified by the partnership in respect of a payment made

by him to discharge the whole or a part of his personal liability under subsection (1) for a partnership obligation or in reasonable settlement of an alleged personal liability of his under subsection (1).

(6) The indemnity does not affect any claim which the partnership or a partner

may have against A.

(7) This section is subject to section 35 (restrictions on liability of former partners or employees by "holding out").

Changes in partners

27	Admission of new partners

(1)It is a default rule that a person may become a partner in a partnership only

with the agreement of all the existing partners.

360

EXPLANATORY NOTES

How long does a third party claimant who has obtained judgment against the partnership have to issue proceedings against an individual partner? The answer is provided by Schedule 2 (which is introduced by subsection (3)). The third party has two years from the date of judgment against the partnership, or until the limitation/prescriptive period against the partnership expires, whichever is longer. This rule has no counterpart in the existing law. See the report, paragraphs 7.65 - 7.72.

Subsection (4) abolishes the rule in Scotland which allows diligence against partners on a decree against the partnership by stating as a rule, throughout Great Britain, that a judgment against a partnership is not enforceable against the property of a partner. A creditor who wishes to enforce against the property of a partner must also obtain judgment against him. See the report, paragraphs 7.63 and 7.64(3).

Liability of non-partners by holding out

Clause 26

This clause deals with the situation where as a result of a representation a non-partner (A) appears to a third party (B) to be a partner and, in reliance on the representation, B deals with the partnership and ends up being owed some money which the partnership does not pay. The clause sets out the circumstances in which A is personally liable to B.

Subsection (4) ensures that, if A is personally liable in this way, that liability is treated like a secondary liability of a partner, governed by clause 23. See the report, paragraphs 6.99 and 6.106(1).

Subsection (5) gives A an indemnity from the partnership for any amount paid out to satisfy this personal liability. T he partners will be secondarily liable for that indemnity under clause 23. A will, in this way, often get his money back. A will not be able to do so only if (1) the partnership and the partners have inadequate funds; or (2) A is liable independently to the partnership or partners (for example in negligence). Subsection (6) ensures that the indemnity in subsection (5) is not taken to rule out the second possibility.

It may well be the case that A will have been a partner in the past. The draft Bill provides some rules, in clause 35, referred to in subsection (7), limiting the circumstances in which such a person may become liable under this clause. These rules enable someone who leaves a partnership to take steps to reduce the risk of personal liability arising under this clause. Clause 35 protects former salaried partners as well as former partners.

This clause is a statutory application of the law of estoppel/personal bar. It reproduces, with substantial clarifications, the existing law under the 1890 Act (section 14). See the report, paragraphs 6.96 - 6.106(1) - (3).

Changes in partners

Clause 27

Just as agreement is necessary between all the prospective partners before a partnership forms (clause 1), so agreement is necessary - between all the existing partners and the prospective partner - before a prospective partner can join a partnership. Subsection (1) ensures that this is the case. The rule is a default rule, so if a partnership agreement provides that the agreement of a smaller proportion of partners will suffice, then that will be effective.

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Partnerships Bill			11
Part 2 - General partnerships
	(2)	The agreement may be inferred, in particular, from the fact that he starts to
		carry on the partnership business together with the existing partners with the
		object of making a profit.
28		How persons cease to be partners
	(1)	A person ceases to be a partner in a partnership only if-		5
		(a)	a term of the partnership agreement under which he ceases to be a
			partner (whether or not a default rule) has effect in relation to him,
		(b)	he and all the other partners agree that he is to cease to be a partner,
		(c)	he dies or (if not an individual) is dissolved,
		(d)	the partnership is dissolved, or	10
		(e)	an order under section 47(1) (a) or (b) (removal of partner) has effect in
			relation to him.
	(2)	The following provisions contain default rules as to the circumstances in which
		a person ceases to be a partner -
		(a)	section 29 (insolvency),	15
		(b)	section 30 (power to resign), and
		(c)	section 31 (power to expel a partner).
	(3)	This section and section 30 are subject to section 40 (restriction on ceasing to be
		a partner on or after break up of the partnership).
29		Ceasing to be partner on ground of insolvency		20
	(1)	This section contains default rules.
	(2)	A partner who is an individual ceases to be a partner if-
		(a)	a bankruptcy order is made against him under Part 9 of the 1986 Act, or
		(b)	an award of sequestration is made under section 5 of the 1985 Act in
			respect of his estate.	25
	(3)	A partner which is a company ceases to be a partner if a winding-up order is
		made against it under Chapter 6 of Part 4 of the 1986 Act.
	(4)	A partner which is a partnership ceases to be a partner if-
		(a)	a winding-up order is made against it under a provision of the 1986 Act
			(as applied by an order under section 420 of that Act), or	30
		(b)	an award of sequestration is made under section 6 of the 1985 Act in
			respect of its estate.
	(5)	"The 1986 Act" means the Insolvency Act 1986 (c. 45).
	(6)	"The 1985 Act" means the Bankruptcy (Scotland) Act 1985 (c. 66).
30		Power to resign		35
	(1)	This section contains default rules which apply to-
		(a)	a partnership which is not one of defined duration, or
		(b)	a partnership of defined duration in which one or more persons has at
			any time ceased to be a partner involuntarily.
	(2)	A partner may resign from the partnership at any time by giving each other		40
		partner not less than 8 weeks' notice of his intention to do so.

362

EXPLANATORY NOTES

All agreements in the draft Bill may be inferred from conduct (clause 76(2)). Subsection (2) indicates that an inference as to the existence of the agreement required under subsection (1) is appropriate if the purported partner starts to carryon business with the existing partners for profit; it is not necessary for any of the parties to have turned their mind to the question of partnership specifically. This reflects the existing law. See the report, paragraphs 10.27 and 10.30(5).

Clause 28

Subsection (1) provides an exhaustive list of ways in which someone can cease to be a partner. Subsection (2) provides more detail on the first of these by listing the relevant default rules.
Under the 1890 Act, if a person ceases to be a partner, the partnership is always "dissolved". Under the draft Bill, however, one of two things may happen. One possibility is that the partners continue in business as before. So, for example, one partner in a three partner firm might resign under the default rule (in clause 30) and the other two might decide to continue. The other possibility is that the partnership "breaks up" which is the first step in the process of winding up the partnership (see clause 38 and following). This would be the result if, for example, two partners in a three partner firm resigned under the default rule in clause 30.
If a partnership breaks up (whether as a result of a partner ceasing to be a partner or otherwise), the rules on ceasing to be a partner change, as specified in clause 40. This is referred to in subsection (3). The reasons for the change in the rules in this situation are set out in the explanatory note to that clause. See the report, paragraphs 8.82 - 8.136.

Clause 29

This clause provides a default rule under which a partner who becomes insolvent (as defined in subsections (2), (3) and (4)) ceases to be a partner. Under the 1890 Act (section 33) the rule was that the insolvency of a partner brought the partnership to an end. See the report, paragraphs 8.101 and 8.110(1).

Clause 30

This clause provides a default rule entitling partners to resign. Under the current law the default arrangement is the partnership at will. It is dissolved immediately when any partner gives notice. It is created where partners do not define the period during which they are to be in partnership and may also come about on the expiry of a period defined in a partnership agreement. Under the draft Bill, the new default position is that, whilst a partner has a right to resign (under this clause), resignation will leave the remaining partners in a continuing partnership.
A partner who leaves a continuing partnership will, by default, be paid by the partnership for his partnership share (see clause 32) and receive an indemnity from the partnership and remaining partners (see clause 34). In those circumstances, there is a danger that a partner might be tempted to leave a partnership which was experiencing difficulties before his colleagues in order to receive a larger payout and more valuable set of indemnities. Two aspects of the draft Bill are designed to prevent this. First, this clause enables partners who receive notice of a partner's resignation to resign with effect from the same date. Secondly, partners who have not issued notices of resignation may decide to wind the partnership up at any time.
Subsection (1) sets out the partnerships to which the default right to resign applies. The right does not, in general, apply in a "partnership of defined duration". (This phrase is defined in clause 76(1).) The reason is that, in such a partnership, the partners have agreed to be locked in: it would be inappropriate for a default rule to override that agreement. The exception to this is if a partner in such a partnership has died, or ceased to be a partner because of insolvency. In such circumstances, it would not be right to lock partners in unless they specifically contemplated this possibility.

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12			Partnerships Bill
			Part 2 - General partnerships
	(3)	If-
		(a)	there are three or more partners in the partnership, and
		(b)	a partner gives a resignation notice under subsection	(2) or the
			partnership agreement,
		any of the other partners may resign from the partnership at the same time as			5
		that notice takes effect by giving each remaining partner not less than two
		weeks' notice of his intention to do so.
	(4)	"Partnership of defined duration" has the meaning given by section 76(1).
	(5)	"Involuntarily" means because of-
		(a)	his death or (if not an individual) dissolution, or		10
		(b)	his insolvency.
	(6)	"Remaining partner" means a partner who has not given a resignation notice
		under subsection (2) or (3) or the partnership agreement.
	(7)	This section is to be read with section 38(2) to (4) (events which break up a
		partnership) .			15
31		Power to expel partner
	(1)	This section contains default rules which apply to a partner if-
		(a)	an order is made under section 46 charging his share in the partnership,
			or
		(b)	the whole or a part of his share in the partnership is subject to an		20
			arrestment in execution in respect of a debt which is not a partnership
			debt.
	(2)	The other partners are entitled to give him a notice expelling him from the
		partnership.
	(3)	The expulsion notice takes effect at the end of the period of 3 months starting			25
		with the day on which it is given.
	(4)	But the expulsion notice is to be treated as having no effect if, before the end of
		the 3 month period-
		(a)	the order under section 46 is revoked, or
		(b)	the arrestment is recalled or withdrawn or otherwise ceases to have		30
			effect.
32		Realisation of former partner's share (other than on winding up)
	(1)	This section contains a default rule which applies if a person ceases to be a
		partner in a partnership before the break up of the partnership.
	(2)	The former partner is entitled to be paid by, or is liable to pay to, the			35
		partnership -
		(a)	the amount given by subsection (3), and
		(b)	interest on it at the prescribed rate from the date on which he ceases to
			be a partner.
	(3)	The amount is that to which he would have been entitled, or for which he			40
		would have been liable, if on that date-
		(a)	the partnership had broken up,
		(b)	the partnership assets were realised for the greater of-

364

EXPLANATORY NOTES

Subsection (2) confers the right to resign. A partner must give 8 weeks' notice, or more, of his resignation to every other partner. There are no presumptions in the draft Bill about when notice is to be taken to have been given. So a partner must ensure that each other partner actually gets at least 8 weeks' notice. If a partner gives a valid notice then he will cease to be a partner on the expiry of the notice (unless the partnership breaks up on or before that date).

Subsection (3) gives a recipient of a resignation notice under subsection (2) the right to resign with effect from the same moment by giving not less than two weeks' notice. Subsection (7) refers to clause 38(2) - (4). Those subsections contain a default rule under which at least half of the partners who have not given notices of resignation may decide to wind up the partnership at any time. If they do so at the same time as, or before, the resignation notices take effect, then all the partners will be treated alike in the winding up (see clause 40). Subsection (3) and clause 38(2)-(4) will thus enable partners to prevent a partner from escaping his responsibility for partnership obligations at their expense by exercising his default right to resign from a continuing partnership. See the report, paragraphs 8.19 - 8.30, 8.82 - 8.100(1) and (2),8.103 - 8.104, and 8.110(3) and (4).

Clause 31

This clause provides a default power of expulsion. It is very narrow. The only circumstance (in England and Wales) in which a partner may be expelled under this default rule is if the benefit of the financial rights attaching to his status as partner are, by order of the court (under clause 46), transferred to a judgment creditor. The reason for this is that a partner who is financially embarrassed in this way, and is no longer interested financially in the partnership, may no longer have its best interests at heart. Similarly, in Scotland, a partner may be expelled where the whole or a part of his share in the partnership is arrested in execution in respect of a debt which is not a partnership debt. See the report, paragraphs 8.107 - 8.109 and 8.110(6).

Under the current law, there is no default power to expel. This clause replaces section 33(2) of the 1890 Act which gave an option to dissolve the partnership where a partner's share had been charged.

Clause 32

Under the draft Bill a partner may leave a continuing partnership. If that happens, what are the former partner's rights and obligations in relation to the partnership and the remaining partners? This clause, and clause 34, provide default rules to answer this question.

Subsection (2) converts the outgoing partner's share in the partnership into a debt owed to him by the partnership, or by him to the partnership (according to the financial position of the partnership and the status of his account with the partnership) when he leaves. Subsection (3) specifies how the valuation exercise is to be carried out. It is designed to give the outgoing partner the value of his share in the partnership based on the market value of the partnership if it could be sold as a going concern, or the market value of partnership property. This reflects the terms on which many retiring parties are bought out in current practice. See the report, paragraphs 8.62 - 8.68, 8.74 - 8.75(1) and (2), 8.77 8.78 and 8.110(2).

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(i) the market value of the partnership property, and

(ii) the market value of the partnership business if sold as a going concern without him, and

section44(distribution of partnership's assets on winding up)orany

substitute provisions in the partnership agreement.

33	Liability of former partner for obligations incurred while a partner

(1) A person who ceases to be a partner does not by doing so cease to be personally liable under section 23(1) for partnership obligations incurred while he was a

partner.

(2) Sections 23(2) to (5), 24 and 25 apply to a former partner as they apply to a partner.

(3) An agreement between a former partner, the partnership and a creditor to discharge the former partner from his personal liability for a partnership

obligation does not require valuable consideration.

(4) Subsection (3) extends to England and Wales only.

34	Former partners: indemnity and contribution, and return of property

(1) This section contains default rules.

(2) A former partner is entitled to be indemnified by the partnership in respect of

a payment made by him to discharge the whole or a part of his personal

liability for a partnership obligation or in reasonable settlement of an alleged personal liability for a partnership obligation.

(3) The indemnity does not affect any claim which the partnership or a partner may have against the former partner.

(4)If the partnership does not pay the indemnity (or part of it), the former partner

is entitled to-

(a) indemnity from any person who was a partner when he ceased to be a partner and who continued to be a partner after he ceased to be a partner, or

(b)contribution from any person who was liable with him for the

partnership obligation (or, in the case of settlement of an alleged liability, would have been liable if the alleged liability had been established) of such amount as is just and equitable.

(5) Subsection (4) does not apply if the former partner ceased to be a partner on or

after the break up of the partnership (inwhich case the relevant default rules

are in section 44 (distribution of partnership's assets on winding up)).

(6) "Personal liability for a partnership obligation" includes-

(a) a personal liability under section 23(1) for a partnership obligation, and (b) a liability under subsection (4) to indemnify (or make a contribution to)

a former partner in respect of the partnership obligation to indemnify

him under subsection (2).

(7) A former partner must, on request, transfer any partnership property which is held in his name to-

(a) the partnership, or

366

EXPLANATORY NOTES

Clause 33

Subsections (1) and (2) ensure that a partner does not escape unlimited personal liability for partnership obligations already incurred (arising under clause 23) on leaving the partnership. This reflects the existing law. Of course, a former partner is likely to receive an indemnity from the partnership and remaining partners on departure (and does so under the default rules in clause 34). But this does not affect the position as between the former partner and a third party claimant.

Subsection (3) ensures that an agreement between a creditor and the former partner and the partnership that the former partner is no longer to be liable for the debt is enforceable. This clarifies an uncertainty in the existing English law. See the report, paragraphs 6.86 6.88(1) and (3).

Clause 34

What rights does a former partner have against the partnership and continuing partners if he has to make a payment from his personal assets for a partnership liability? This clause contains default rules answering this question (just as clause 12 contains default rules containing the answer to the same question in relation to current partners).

Subsection (2) enables a former partner who has made such payments to claim reimbursement from the partnership. The indemnity conferred by this provision is identical to that conferred on current partners who make such payments (in clause 12(3)(b)) and covers payments made reasonably and in good faith in settlement of an alleged liability. There is no need to indemnify a former partner for expenses incurred (as is provided for current partners in clause 12(3)(a)) as the former partner is no longer carrying on the business.

Subsection (3) makes it clear that, as for current partners, the indemnity does not prevent a partner or the partnership from making a claim against the former partner.

Subsection (4) provides for the situation where the partnership does not pay the indemnity to which the former partner is entitled. The former partner is entitled to look to two sets of partners. First (paragraph (a)) he is entitled to look to those who were partners at the moment the former partner left the partnership. They were the people who "bought out" his share under the default rule in clause 32. Secondly, he is entitled to look to the partners who were liable with him for the partnership obligation he paid (paragraph (b)) for a "just and equitable" contribution.

101.	Note that the fact that these provisions are default rules does not mean that a partnership

can decide not to pay a former partner under this rule by changing it. If the default rule applied when a former partner left the partnership then rights will have accrued under it. Note also that, if the former partner is owed money by the partnership for any reason other than the indemnity in clause (2) (for example if the partnership fails to pay an amount owing under the default rule in clause 32) he will be entitled to apply to court for an order under clause 53.

The purpose of subsection (5) is to ensure that, if the partnership is being wound up, the correct default rules governing the rights of the partners (as between each other) apply.

Subsection (7) ensures that a partnership can recover its property from former partners.

See the report, paragraphs 8.69 - 8.73, 8.75(3), 8.79 - 8.80 and 8.100(3).

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(b) a trustee for the partnership.

35	Restrictions on liability of former partners or employees by "holdingout"

(1) This section limits the circumstances in which a person ("A") who has ceased to be a partner in a partnership may be held personally liable under section

26(1)for a partnership obligation incurred to a person("B")who dealt with the

partnership in reliance on a representation that A was a partner.

(2) A is not liable if the representation was made or communicated to B (a) while A was still a partner, but

(b) more than one year before B dealt with the partnership in reliance on it.

(3)Aisnotliableif-

(a) the representation was made or communicated to B while A was still a partner, and

(b) before B dealt with the partnership in reliance on the representation, notice that A was ceasing, or had ceased, to be a partner was given to B

(or sent to B's last known address).

(4) A is not liable if the representation consists merely in-

(a) the partnership business continuing to be carried on in the same partnership name, or

(b) the partnership name continuing to include A's name,

after A has ceased to be a partner.

(5) In this section, references to a partner in a partnership include an employee of the partnership.

36	Position of assignee set c. of partner's share

(1) This section applies if the whole or a part of the share in a partnership of a

partner("A")isassigned(whether voluntarily or as a result of death,

insolvency or otherwise) to another person ("B").

(2) B may not-

(a) take part in the management or administration of the partnership business or affairs, or

(b)inspect any partnership records.

(3) But that does not affect any of B's rights to receive amounts in respect of the whole (or part) of-

(a) A's share in the partnership profits, or

(b) A's entitlement on ceasing to be a partner or on the winding up of the

partnership.

(4) Nothing in this section prevents a person to whom a partner has assigned the whole of his share absolutely from becoming a partner in place of the assignor if-

(a) all the partners agree to the substitution, or

(b)the substitution is made in accordance with the partner ship agreement.

368

EXPLANATORY NOTES

Clause 35

A non-partner may be liable to a third party, as if a partner, if he held himself out as a partner (under clause 26). This clause mitigates the severity of that rule for former partners, and for former salaried partners (who are employees who appear to the outside world as partners).

Subsections (2) and (3) limit the operation of clause 26 in cases in which the representation was true when made. Subsection (2) means that a former partner can be absolutely sure that no liability will arise on the basis of such a representation once a year has elapsed since the representation. Subsection (3) enables a former partner to remove all possibility that a liability will become due to particular third parties, by sending them notice of his departure. See clause 41 in relation to notices. Subsection (4) clarifies that the continued use of the partnership name, even if it includes the former partner's name, does not amount to a representation which could give rise to such a liability. Subsection (5) extends the protection in this clause to former salaried partners. It would not be right for them to be in a worse position than former partners.

The rules in this clause are different in some respects from those in the 1890 Act (sections 36 and 14). See the report, paragraphs 6.100 - 6.104 and 6.106(4) - (7).

Clause 36

In a limited company, the management of the business is under the control of the board of directors, but profits are owned by the shareholders. In a partnership, there is no such distinction. The partners fill both roles. If a partner purports to assign his rights in the partnership to another person (or if this happens by operation of law, for example on death or insolvency) the question arises: do the rights attaching to both of these roles transfer, or only some of them? This clause provides the answer: the assigning partner cannot transfer his rights to manage the business or to access internal information. That which he transfers is his share (whole or part) in the partnership profits or his entitlement on ceasing to be a partner or on the winding up of the partnership. Subsection (4) clarifies that this does not, however, prevent the assignee becoming a partner in the usual way (eg if the existing partners agree, or in accordance with the relevant term(s) of the partnership agreement).

This clause broadly reflects the existing law in the 1890 Act (section 31). See the report, paragraphs 13.13 - 13.17.

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Partnerships Bill

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37	Position where partner's share is arrested in execution(Scotland)

(1) This section applies where the whole or a part of a partner's share in the partnership is subject to an arrestment in execution.

(2) The arresting creditor is not prevented from raising an action of furthcoming

in pursuanceo f the arrestment, and the court is not prevented from granting

decree in any such action, by reason only that, at the time the action is commenced or the decree granted, the share or part arrested is not yet payable to the partner.

(3) But any decree of furthcoming granted in pursuance of the arrestment cannot

been forced in respect of the share or part arrested until it becomes payable to

the partner.

(4) The arresting creditor is not, by virtue only of the arrestment or any decree of furthcoming granted in pursuance of it, entitled to take part in the management or administration of the partnership business or affairs.

Break up of partnerships

38	Events which break up a partnership

(1) A partnership breaks up only if-

(a) the number of partners falls below two,

(b) a term of the partnership agreement under which the partnership is to

end (whether or not a default rule) takes effect (unless all the partners

agree, within a reasonable period, to continue the partnership), or

(2) Subsections (3) and (4) contain default rules which apply to-

(a)a partnership which is not one of defined duration, or

(b) a partnership of defined duration in which one or more persons has at any time ceased to be a partner involuntarily.

(3) If at least half the partners decide that the partnership should end, it ends on the date agreed by the partners who so decided.

(4)If a partner has given a resignation notice under section 30(2)or(3)or the

partnership agreement, he is to be treated as not being a partner for the purpose of subsection (3).

(5) If subsection (1)(b) applies, the partnership breaks up on the date provided for by the partnership agreement.

(6)An agreement to end (or to continue) a partnership may bei nferred, in

particular, from the fact that the partners have ceased (or continue) to carry on the partnership business together with the object of making a profit.

(7) "Involuntarily" means because of-

(a) his death or (if not an individual) dissolution, or

(b)hisinsolvency.

370

EXPLANATORY NOTES

Clause 37

This clause applies to Scotland only. It clarifies and develops the existing law of arrestment and furthcoming in so far as it applies to the methods by which a creditor who has arrested in execution a partner's share in the partnership can realise that share. It also makes clear that the arrestment and furthcoming does not entitle the creditor to take part in the management of the partnership business. See the report, paragraphs 7.73 - 7.75.

Break up of partnerships Clause 38

One of the advantages of the introduction of separate legal personality for partnerships is that it enables the partnership to survive various events, such as a change in partners, or an illegality affecting a partner, which under the current law bring the partnership to an end. In some circumstances, of course, it is right that the partnership should come to an end. When is this to be the case under the draft Bill, and how will a partnership come to an "end" in the context of separate legal personality? This clause, and the ensuing clauses, provide answers to those questions, by setting out an exhaustive list of the circumstances in which a partnership breaks up and the effects of break up.
Subsection (1) introduces the concept of "break up". Break up is the first stage of the demise of a partnership. In that respect it is the equivalent of "dissolution" under the current law. (N ote that "dissolution" is used in a quite different sense in the draft Bill to signify the end, rather than the beginning, of the winding up process (see clause 45)). A partnership can break up only in one of the three sets of circumstances specified in this su b section.

Subsection (3) contains a default rule under which at least half the partners may at any time elect to break up the partnership. Thus, if a vote is tied, where all the partners have voted, the partnership will break up. As partnership is a consensual arrangement, it would not be right to require it to continue unless a majority of those involved agree. The exception to this (subsection (2)) is a partnership of defined duration (as defined in clause 76(1)) in which no-one has died or become insolvent. In such a partnership, the partners have committed themselves to staying together.
Su bsection (4) clarifies the way in which this default rule is to operate if a partner has tendered a resignation notice. We anticipate that in some partnerships the resignation of a certain 'key' partner or partners may cause all the other partners to consider whether the partnership should continue or should be broken up under (3). Under subsection (4) the partner who has given a resignation notice cannot vote under subsection (3). Neither does the partner who has resigned count as one of the total number of partners for the purposes of the vote. This is to allow the remaining partners to consider whether they wish to continue given the fact of the resignation under subsection (4).
All agreements referred to in the draft Bill may be inferred from conduct (clause 76(2)).

Subsection (6) provides specifically that agreements to end or continue a partnership may be inferred simply from the fact that the business stops or continues; the partners need not consider the question of "break up" itself. This subsection is similar to clause 27(2) in indicating the way in which the provisions of the draft Bill are to be interpreted in cases in which the partners may not be aware of the legal effect of their actions, or indeed that they are in partnership at all. See the report, paragraphs 8.19 - 8.30, 8.89 - 8.99, 8.100(3), 8.101 - 8.106, 8.110(5) and 12.13 - 12.23(1).

Another important effect of this clause is that it excludes contractual doctrines such as acceptance of repudiatory breach of contract, frustration and rescission for fraud or misrepresentation. See the report, paragraphs 8.119 - 8.124 and 8.84.

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16			Partnerships Bill
			Part 2 - General partnerships
39		Effects of break up
	(1)	Once a partnership breaks up, the partnership business may be carried on only
		in so far as permitted under-
		(a)	section 43 (winding up of partnership by partners),
		(b)	Schedule 4 (winding up of partnership by liquidator), or	5
		(c)	Schedule 5 (functions of provisional liquidator).
	(2)	But a partnership which has broken up is not dissolved as a legal person until
		the conditions specified in section 45 are satisfied.
	(3)	This section and the other provisions of this Act are subject to-
		(a)	any provision of the Insolvency Act 1986 (c. 45) (as applied by an order	10
			under section 420 of that Act (insolvent partnerships)), and
		(b)	the Bankruptcy (Scotland) Act 1985 (c. 66).
40		Restriction on ceasing to be a partner on or after break up
	(1)	If, on the break up of a partnership, a person ceases to be a partner, he is
		nevertheless to be treated as continuing to be a partner during the winding up		15
		of the partnership.
	(2)	Subsection (1) does not apply if he ceases to be a partner involuntarily.
	(3)	After the break up of a partnership (and before its dissolution), a person ceases
		to be a partner only if he does so involuntarily.
	(4)	"Involuntarily" means because of-		20
		(a)	his death or (if not an individual) dissolution,
		(b)	his insolvency,
		(c)	his expulsion, or
		(d)	his removal under an order under section 47(1) (a) or (b).
			Changes in partners and break up of partnerships: supplementary	25
41		Publicity for departure of partner or break up of partnership
	(1)	If a person ceases to be a partner in a partnership, he or any partner-
		(a)	is entitled to publish notice of the fact, and
		(b)	may require the partnership or any other partner to give any necessary
			consents.	30
	(2)	If a partnership breaks up, any partner or any person who ceased to be a
		partner on or after the break up-
		(a)	is entitled to publish notice of the break up, and
		(b)	may require the partnership or any other partner to give any necessary
			consents.	35
	(3)	"Necessary consent" means consent to any act which is necessary or proper for
		publishing the notice and cannot be done without the agreement of the
		partnership or partner.
42		Protection for property acquired after break up
	(1)	In this section "successor" means a partnership -		40

372

EXPLANATORY NOTES

Clause 39

This clause explains the effect of "break up" and introduces the two ways in which the winding up may be done under the draft Bill: by the partners under clause 43 (which is expected to be the norm, as under the existing law), or by a liquidator under clause 50 and Schedule 4. Subsection (1) also mentions the other possibility following break up which is that the court appoints a "provisional liquidator" (whose duties are set out in Schedule 5) to safeguard the partnership's assets pending a decision on whether a liquidator should be appointed. Subsection (2) ensures that the partnership will continue to exist as an entity after break up (see clause 45).

117. T he provisions in the draft Bill relating to the winding up of a partnership are not designed to deal with the partnership which is insolvent. In such cases, separate insolvency legislation is needed. Hence, subsection (3), which makes the draft Bill subject to the current partnership insolvency and partnership bankruptcy legislation (namely, the Insolvency Act 1986 in England and Wales and the Bankruptcy (Scotland) Act 1985 in Scotland). See the report, paragraphs 12.13 -12.23.

Clause 40

Clause 30 and clause 38(3) - (4) contain default rules under which a partnership may break up on a particular date, either because all or all but one of the partners have tendered resignation notices, or because at some point at least half of those who have not yet tendered resignation notices decide to break it up. If the partnership breaks up in such a way, then all the partners involved will (1) have equal rights to be involved in the winding up, whether that is conducted by themselves or by a liquidator; (2) be personally liable as partners for any partnership obligation incurred during the winding up. The purpose of this clause is to ensure that this is the case. Its effect is that, as a general rule, all those who were partners at the moment immediately before break up continue to be treated as partners until the partnership is dissolved.
T he exception to this rule is if a partner ceases to be a partner in volun tarily, as set out in subsection (4). Such people will no longer be involved in the winding up, or be personally liable for partnership obligations incurred after they ceased to be partners. T hey will, however, together with all the remaining partners (and people treated as partners by virtue of subsection (1)) be treated alike when gathering in and distributing partnership assets, under the default rule in clause 44. See the report, paragraphs 12.24 - 12.25.

Changes in partners and break up of partnerships: supplem entary

Clause 41

Those who leave a continuing partnership may, in limited circumstances, find themselves liable to third parties for partnership obligations incurred after they leave (see clause 26). They can limit their chance of incurring such liability by publicising their departure (see clause 35). This clause ensures that such people are entitled to take steps to protect themselves by publicising their departure. The clause reflects the existing law in the 1890 Act (section 37). See the report, paragraphs 13.18 - 13.20.

Clause 42

The legal analysis of property ownership under the existing law in England and Wales (in the absence of separate legal personality) is difficult. Particular problems include (1) the sui generis nature of the partners' property rights, and (2) the correct analysis of what happens to property rights when a partner joins or leaves. The introduction of separate legal personality removes the first problem: the entity itself can own property, or be the beneficiary of a trust. The second problem largely disappears also: the partnership under the draft Bill will usually continue to exist despite changes in membership. However, there may still be occasions on which it does not. T his clause is designed to ensure that, in such situations, property transfers subsequently made to third parties in good faith are not invalidated. See the report, paragraphs 9.52 - 9.65.

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Partnerships Bill			17
Part 2 - General partnerships
		(a)	formed on or after the break up of a partnership which has not been
			dissolved ("the former partnership"), and
		(b)	at least one of whose partners is a partner in the former partnership.
	(2)	Subsection (3) applies if the successor purports to transfer property to another
		person ("the acquirer") who-		5
		(a)	acts in good faith,
		(b)	provides valuable consideration, and
		(c)	has no notice that the property is not partnership property of the person
			purporting to transfer it.
	(3)	The acquirer's title to the property (and that of any person to whom the		10
		property is subsequently transferred) cannot be challenged on the ground that
		the property was in fact partnership property of the former partnership.
	(4)	For the purposes of this section, the transfer of property to a person includes-
		(a)	in England and Wales, the grant to him of an interest created out of the
			property, and	15
		(b)	in Scotland, the creation in his favour of a subordinate real right over
			the property.
			Winding up and dissolution of partnership
43		Winding up by partners
	(1)	If a partnership breaks up, it may be wound up under this section by one or		20
		more of the partners.
	(2)	Subsection (3) applies if, after the break up, there are two or more partners.
	(3)	The partnership business may be carried on-
		(a)	if the partners agree that it should be carried on, and
		(b)	so far as is necessary for the beneficial winding up of the partnership.	25
	(4)	Otherwise, the authority of a partner to bind the partnership continues so far
		as is necessary to-
		(a)	wind up the partnership, and
		(b)	complete any transactions begun but unfinished at the time of the break
			up.	30
	(5)	It is a default rule that differences about other matters connected with the
		winding up of the partnership under this section may be decided by a majority
		of the partners.
	(6)	An agreement under subsection (3) may confer authority on one or more of the
		partners for the purpose of carrying on the partnership business in accordance		35
		with that subsection.
44		Distribution of partnership's assets on winding up
	(1)	This section contains default rules about-
		(a)	the way in which a partnership's assets must be dealt with after its
			break up, and	40
		(b)	the settlement of accounts between the partners before its dissolution.

374

EXPLANATORY NOTES

Winding up and dissolution of partnership

Clause 43

Typically, a partnership which has broken up will be wound up by the partners. This clause sets out the partners' rights and obligations in such a situation.

For the purpose of winding up there will usually be more than one partner (see clause 40 of the draft Bill, the note on it and the further notes on this clause.) In such a case, subsection (3) clarifies that the partners can agree to carryon the partnership business so far as is necessary for the beneficial winding up of the partnership. Such an agreement can confer authority on one or more of the partners for that purpose. See subsection (6). The partners will continue to have authority as agents of the partnership under the general law and under the draft Bill.

In the situation where there is only one remaining partner, he will have power to wind up the partnership entity and to complete any transactions begun but unfinished at the time of break up. See subsection (4). He will not be able to continue the partnership business by entering into new transactions. It would be open to him to continue as a sole trader while winding up the partnership, but, if he wanted to use any partnership assets for his own business, he would require to negotiate with interested parties such as the personal representative of a deceased former partner. Subsection (4) will also apply where there is more than one remaining partner but the remaining partners do not agree to carryon the partnership business under subsection (3).

It is possible that the partners might disagree about a decision which needs to be taken during the winding up. How is such a difference of opinion to be decided? Subsection (5) provides a default rule that a simple majority will bind all of the partners. In the absence of such a rule, it might appear that the standard default rules on decision-making in clause 14 would require unanimity. That would be likely to create stalemates. A partner disgruntled by the outcome of a vote under subsection (5) would be entitled to apply to court for the appointment of a liquidator; and he could try to protect existing assets by the immediate appointment of a provisional liquidator (see clauses 50 and 51). But until any order is made, he would be bound, under this default rule, by the majority. This is new: under the existing law, in the event of dispute, an application to court is required. See the report, paragraphs 12.20 - 12.21 and 12.23(2) - (4).

It is important to note that the expression "partners" in this clause includes those who are treated as partners by clause 40. See the note to that clause for the reasons for this. There may be other people who are interested in the winding up (i.e. have financial rights from and/or obligations to the partnership), in particular those who have left the partnership involuntarily since the break up. If such people object to a decision made in the winding up, including a decision to continue the business, they have a right to apply for the appointment of a liquidator or provisional liquidator under clauses 50 and 51. They may also apply for other orders under clause 53. See the note to that clause.

Clause 44

When a partnership is wound up (whether by the partners or a liquidator), it will be necessary to gather in and distribute the partnership's assets. This clause provides default rules about how this should be done. Partners may agree different rules for the distribution of partnership assets. Creditors are ultimately protected by the unlimited liability of the partners.

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18		Partnerships Bill
		Part 2 - General partnerships
(2)	In this section "partner" includes a person who ceased to be a partner on or
	after the break up.
(3)	The partnership's assets must be dealt with as follows -
	Step 1
	Each partner must pay to the partnership any amount which he owes to it.		5
	Step 2
	The partnership must pay its debts and discharge its liabilities to persons other
	than partners.
	If the partnership does not have sufficient assets to do this in full, the partners
	must contribute amounts, in the same proportions as they would be liable to		10
	bear any partnership losses, in order to make up the shortfall.
	Step 3
	The partnership must pay to each partner any amount (other than in respect of
	capital) which it owes to him.
	If the partnership does not have sufficient assets to do this in full, the partners		15
	must contribute amounts, in the same proportions as they would be liable to
	bear any partnership losses, in order to make up the shortfall.
	Step 4
	The partnership must pay to each partner any amount which it owes to him in
	respect of capital.		20
	If the partnership does not have sufficient assets to do this in full, it must pay
	the remaining assets to the partners in proportion to their respective capital
	contributions.
	Step 5
	The partnership must distribute any surplus among the partners in the same		25
	proportions as they would be entitled to share any partnership profits.
(4)	A partner is not required to contribute-
	(a)	under Step 2 or 3 in respect of a partnership obligation for which he is
		not secondarily liable,
	(b)	under Step 3 in respect of a partnership obligation to indemnify another	30
		partner under section 12(3) if he would not be liable under section 12(5)
		to make a contribution to that partner in respect of the obligation, or
	(c)	under Step 3 in respect of an amount which is owed to another partner
		and to which section 12(7) applies, if he would not be liable under that
		provision to make a contribution to that partner in respect of the	35
		amount.
(5)	If a partner-
	(a)	is not required to contribute an amount under Step 2 or 3 because of
		subsection (4), or
	(b)	is unable, as a result of his insolvency, to contribute an amount required	40
		under Step 2 or 3,
	the other partners must contribute that amount according to the proportions in
	which they are liable (as between themselves only) to contribute under that
	Step.
(6)	A partner is "secondarily liable" for a partnership obligation if-		45

376

EXPLANATORY NOTES

Subsection (2) ensures that the default rules in this clause apply to all those who were partners immediately before break up (see clause 40) including those who ceased to be partners involuntarily on or after break up. So, for example, if a partner dies after break up, his estate is not entitled to be involved in the winding up and is not secondarily liable for partnership obligations incurred thereafter; but the estate is bound by the default rules in this clause, and entitled to be paid out under them.

Subsection (3) sets out the way in which the partners, or the liquidator, must, by default, deal with the partnership's assets. The rules largely reflect those which apply under the existing law (1890 Act, section 44) with the following difference: if a partner puts capital into a partnership and the partnership loses it, the other partners are not obliged, under this default rule, to contribute to that loss. Under the current law, the default position is that the loss is borne equally.

The purpose of subsections (4), (5) and (6) is to ensure that partners are not obliged to contribute amounts to the partnership during the winding up for which they could not be sued by a creditor (subsection (4)(a) and (6)), or in respect of which they could not be pursued by a partner under the relevant default rules (subsections (4)(b) and (4)(c)). For example, suppose a partner joined a partnership and the next day it was wound up under the default rules before new liabilities were incurred and the partnership did not have sufficient funds either to pay the creditors or to repay the partners' loans to the partnership. Such a partner would be relieved of the obligation to dip into his personal assets during the winding up by these subsections.

The purpose of subsection (6)(b) is to deal with a case in which the partnership has insufficient funds, at Step 2 of subsection (3), to pay a creditor who could not sue a particular partner (A) directly (because the obligation was incurred before A joined) but who could sue a former partner to whom A had given an indemnity (under the default rule in clause 34(4) or otherwise). The effect of subsection (6)(b) is that A, will, under these default rules, have to contribute to the partnership to make up a shortfall in respect of the partnership obligation. See the report, paragraphs 12.119 - 12.128.

377

Partnerships Bill			19
Part 2 - General partnerships
		(a)	he is personally liable under section 23(1) for the obligation, or
		(b)	he is potentially liable under section 34(4) to indemnify (directly or
			indirectly) a former partner in respect of the obligation.
45		Dissolution
	(1)	A partnership which has broken up is dissolved when six conditions are		5
		satisfied.
	(2)	The first condition is that all partnership property has been distributed to the
		persons entitled to it.
	(3)	The second is that any trust property has been transferred to-
		(a)	the person entitled to it, or	10
		(b)	a trustee for that person.
	(4)	The third is that there are no outstanding liabilities (or contingent liabilities) of
		the partnership.
	(5)	The fourth is that there is no risk of the partnership incurring any liabilities in
		the future as a result of any past acts or omissions.		15
	(6)	The fifth is that there are no outstanding claims by or against the partnership.
	(7)	The sixth is that, if a liquidator has been appointed under section 50, the
		liquidator has ceased to hold office without being replaced.
	(8)	"Claims" means claims made in legal or arbitral proceedings.
			Court's powers in relation to partnerships	20
46		Order charging partner's share (England and Wales)
	(1)	The court may, on the application by summons of a judgment creditor of a
		partner, make an order charging the partner's share in the partnership with the
		amount of the judgment debt and any interest on it.
	(2)	The court may, by the same or a subsequent order, give such orders or		25
		directions as the case may require and may, in particular-
		(a)	appoint a receiver of the partner's share in the partnership;
		(b)	give such directions for accounts and inquiries as could have been
			given if the charge had been made in favour of the judgment creditor
			by the partner.	30
	(3)	If a sale of the partner's share in the partnership is directed, the other partner
		or partners may purchase the share.
47		Order removing partner or breaking up partnership
	(1)	On the application of a partner in a partnership, the court may make-
		(a)	an order removing another partner from the partnership,	35
		(b)	an order removing the applicant from the partnership, or
		(c)	an order breaking up the partnership.
	(2)	The grounds for making an order under subsection (l)(a) are-

378

EXPLANATORY NOTES

Clause 45

"Dissolution" in the draft Bill is used to refer to the end of the winding up process (in contrast with the current law in which, the term refers to the start of the winding up process). It marks the expiry of the life of the legal entity created by clause 1. When does dissolution occur? This clause provides the answer.
The effect of this clause is that a partnership will continue in existence until it is no longer needed for any of the purposes for which it was created. In particular, the effect of subsection (2) is that it will never be a defence to a claim by a partnership that the partnership has been dissolved; and the effect of subsection (5) is that it will never be a defence to a claim against a partnership that the partnership has been dissolved. As a result of these two features, it has not been necessary to provide in the draft Bill either a mechanism for reinstatement of a dissolved partnership, or for transfer of assets and liabilities from a dissolved partnership to the partners. See the report, paragraphs 12.13 - 12.22 and 12.23(1) and (5).

Court's powers in relation to partnerships Clause 46

A judgment against a partner for a debt (or liability) that is not a partnership debt cannot give rights against the partnership. But his share in the partnership may be a valuable asset. Under this clause the judgment creditor can obtain a charging order over it. The clause reflects the existing law under the 1890 Act, section 23. It does not apply in Scotland because it would be difficult to introduce such a right in the context of the existing law of diligence. See the report, paragraphs 13.10 - 13.12.
If a creditor obtains an order against a partner under this clause (or where, in Scotland, the whole or part of a partner's share in the partnership is subject to an arrestment in execution in respect of a debt which is not a partnership debt) this provides by default, grounds on which he may be expelled (clause 31).

Clause 47

Partners may disagree amongst themselves. If they do, the partnership agreement, the draft Bill and the general law should make clear how the dispute should be resolved. So, for example, in a partnership governed by the default rules in clause 14, a dispute about whether a particular business deal should be concluded should be decided by a simple majority. However, there may be allegations that a partner is in breach of a term of the partnership agreement, or the duty of good faith, or is acting illegally or contrary to the best interests of the partnership. If the partners are not be able to agree a way forward amongst themselves in such circumstances, what course of action is available to them? This clause provides that they may apply to court for relief.
Under the existing law there has until recently been some doubt about the application of contractual doctrines such as repudiatory breach or frustration in such cases. The recent decision of the House of Lords in Hurst v Bryk [2002] 1 AC 185 has given guidance on this question. The approach of the draft Bill is consistent with the approach of Lord Millett in that case as adapted for a law of partnerships with separate legal personality. Under the draft Bill, acceptance of a repudiatory breach of contract will not cause a partnership to break up (see clause 38).
A practical problem with the non-application of contractual doctrines under the current law is that the court is not at present empowered to make orders removing particular partners while allowing the partnership business to continue. It can only order that the partnership be wound up (1890 Act, section 35), although it can by a Syers v Syers order require the buyout of a partner in a winding up instead of the realisation of the partnership's assets. The draft Bill (under this clause and clause 48) changes this. Subsection (1) provides that, on application by a partner, the court may make three kinds of order: an order removing a partner other than an applicant; an order removing the applicant; or an order breaking up the partnership. Only the third kind of order results in the winding up of the partnership. A partner might apply for his own removal in a number of situations - for example, if he had been induced to enter into partnership on the basis of a misrepresentation; or if he profoundly disagrees with the course of action decided upon by the other partners.

379

20			Partnerships Bill
			Part 2 - General partnerships
		(a)	the partner is incapable (whether on physical or mental grounds) of
			performing his duties under the partnership agreement and the
			incapacity is likely to be permanent,
		(b)	the partner's conduct is such as to affect adversely the carrying on of
			the partnership business,	5
		(c)	the partner is in serious or persistent breach of a provision of this Act
			or the partnership agreement,
		(d)	the partnership agreement was entered into or modified as a result of
			fraud, misrepresentation or non-disclosure by the partner,
		(e)	an event has occurred making it unlawful for the partner to remain a	10
			partner,
		(f)	there is no reasonable prospect of the partnership business being
			carried on at a profit unless the partner is removed, or
		(g)	it is just and equitable for any other reason to make the order.
	(3)	The grounds for making an order under subsection (1)(b) are-		15
		(a)	one or more of the grounds in subsection (2)(a) to (d) applies in relation
			to a partner other than the applicant, or
		(b)	it is just and equitable for any other reason to make the order.
	(4)	The grounds for making an order under subsection (l)(c) are-
		(a)	one or more of the grounds in subsection (2)(a) to (e) applies in relation	20
			to a partner other than the applicant,
		(b)	an event has occurred making it unlawful for the partnership business
			to be carried on,
		(c)	there is no reasonable prospect of the partnership business being
			carried on at a profit, or	25
		(d)	it is just and equitable for any other reason to make the order.
	(5)	Schedule 3 contains further provisions about orders under this section.
48		Section 47: interim orders
	(1)	This section applies if-
		(a)	an application has been made under section 47(1) (a) for the removal of	30
			a partner ("P") from a partnership, and
		(b)	the application has not yet been determined.
	(2)	On an application under this section, the court may make an order prohibiting
		P from taking part in, or limiting the extent to which P may take part in, the
		partnership business or affairs until the application under section 47(1)(a) has		35
		been determined.
	(3)	An application under this section may be made by any partner other than P.
	(4)	The order may include-
		(a)	such conditions as the court thinks fit, and
		(b)	such directions as it thinks fit for giving effect to the order.	40
49		Order breaking up partnership on application of Secretary of State
	(1)	The Secretary of State may apply to the court if it appears to him that it is
		expedient in the public interest that a partnership should be broken up.

380

EXPLANATORY NOTES

Subsections (2), (3) and (4) set out the grounds on which the three types of order may be made. These provisions draw on, modify and supplement those specified in the 1890 Act on which the court may make an order winding up the partnership. Two notable additions are the ground of illegality (which under the existing law automatically dissolves the partnership without the intervention of the court: 1890 Act, section 34) and the ground of fraud or misrepresentation (which under the existing law provides a ground for rescission of the partnership agreement: 1890 Act, section 41). See the report, paragraphs 8.119 8.127.

Subsection (5) introduces Schedule 3 which gives applicants and the court further powers and guidance on the orders available, and their effect. See the report, paragraphs 8.128 8.129 and 8.131(1) - (4).

Clause 48

An application to remove a partner (under the previous clause) may be urgent, for example if the partner is allegedly defrauding the partnership. This clause ensures that, in appropriate cases, the court has the power to prohibit the partner from doing specific things, or indeed from doing anything at all in relation to the partnership, pending resolution of the issues raised by the application. T his is not possible under the existing law except by interim injunction or interim interdict. See the report, paragraphs 8.130 and 8.131(5).

Clause 49

A partnership which becomes illegal will continue in existence, and all its partners will continue as partners, unless and until a court order alters the position. An application for an order, either to break up a partnership or to remove one or more of the partners, may be made by partners under clause 47. T his clause additionally enables the Secretary of State to apply for an order to break up an illegal partnership if that is in the public interest. An order under this clause is likely to be accompanied (as permitted by subsection (3)) by an order for the appointment of a provisional liquidator under clause 51 (and of a liquidator under clause 50 in due course). This is new law. See the report, paragraphs 8.140 - 8.146.

381

Partnerships Bill

Part 2 - General partnerships

(2) On an application under this section, the court may make an order for the partnership to be broken up if it thinks it just and equitable to do so.

(3) An application for an order under this section may include an application for an order under section 50 or 51.

(4)An order under this section-

(a) must specify the date on which the partnership breaks up,

(b) may be combined with an order under section 50 or 51 (whether or not such an order was applied for in accordance with subsection (3)), and (c) may include such directions as the court thinks fit for giving effect to

theorder.

(5) Subsection (4)(c) authorises, in particular, a direction restricting the rights conferred on a specified partner by section 43 or Schedule 4.

50	Order appointing liquidator

(1) On an application in respect of a partnership which has broken up, the court

may make an order appointing a liquidator for the purpose of winding up the

partnership and distributing its property.

(2) The application may be made by (a) a partner,

(b) a person interested in the winding up, or

(c)a creditor of the partnership.

(3) An order may require the liquidator to give security (or, in Scotland, caution) for the proper performance of his functions.

(4) Schedule 4 contains further provisions about winding up by a liquidator.

(5) In this section, sections 51 and 53 and Schedules 4 and 5 "person interested in

thewindingup"means-

(a) a person ("A") who ceased to be a partner on or after the break up, (b) if A has died, his personal representative, or

(c) if A ceased to be a partner under the default rules in section 29 (insolvency) or any substitute provisions in the partnership agreement,

the insolvency practitioner appointed in relation to him.

51	Order appointingprovisional liquidator

(1) This section applies if-

(a) an application has been made under section 50 for the appointment of a liquidator for a partnership, and

(b)the application has not yet been determined.

(2) On an application under this section in respect of the partnership, the court may make an order appointing a provisional liquidator.

(3) The application may be made by (a) a partner,

(b)a person interested in the winding up,or

382

EXPLANATORY NOTES

Clause 50

Under the 1890 Act, the options available to partners, if the winding up of a solvent partnership proves contentious, are unsatisfactory. The draft Bill provides for a new procedure by which a solvent partnership may be wound up by a court-appointed official, a liquidator. The powers and duties of a liquidator are found in Schedule 4. An application for the appointment of a liquidator will be made under this clause.

Subsection (1) provides that the application may only be made after the partnership has broken up. Typically, the application will be made if a dispute arises during the winding up. Alternatively, a dispute may be foreseen or have arisen before the partnership breaks up. In that case, the appointment can be made at the same time as an order breaking the partnership up (Schedule 3, para 2).

An application for the appointment of a liquidator under this clause may be made by two categories of people other than current partners: first, other people "interested in the winding up" may apply. These are people who stand to receive a payout (or who may be obliged to contribute) in the winding up as if they were partners. Secondly, creditors may apply. The draft Bill does not specify the grounds on which an application may be granted. T he courts will be free to appoint a liquidator when it is expedient. As the creditor is, ultimately, protected by the secondary liability of partners, it is not expected that such an application will be granted in favour of a creditor unless he shows that the partners are unable or unwilling to wind the partnership up properly. See the report, paragraphs 12.50 12.53(1) and (2).

Subsection (3) enables, but does not require, the court to order a liquidator to provide security. See the report, paragraphs 12.58 - 12.59 and 12.60(2) and (3).

Clause 51

An application for the appoin tmen t of a liquidator may be urgent. For exam pIe, a partner may suspect that some other partners are on the point of making off with a major partnership asset. In such cases, this clause enables the court to appoint a "provisional liquidator" whose function is to safeguard the partnership assets pending resolution of the application to appoint the liquidator. The powers and duties of the provisional liquidator are in Schedule 5. This is new law. See the report, paragraphs 12.54 - 12.56.

383

22	Partnerships Bill

Part 2 - General partnerships

(4) An order may require the provisional liquidator to give security (or, in Scotland, caution) for the proper performance of his functions.

(5) Schedule 5 contains further provisions concerning the functions of the provisional liquidator .

Order for repayment of premium on premature break up of partnership

(1) This section applies if-

(a) a partner ("P") in a fixed term partnership has paid a joining premium to another partner, and

(b) the partnership breaks up before the end of the term.

(2)On an application by P, the court may order the whole or a part of the premium

to be repaid.

(3) In deciding whether to make an order, the court must have regard to (a) the terms of the partnership agreement, and

(b) the actual duration of the partnership.

(4)The court may not make an order if-

(a) the court is satisfied that the break up is caused wholly or mainly by the misconduct of P, or

(b) it has been agreed that no part of the premium should be returned.

(5) "Joining premium" means a premium in respect of-

(a)becoming a partner when the partnership is formed, or

(b) becoming a partner after its formation.

(6) "Fixed term partnership" means a partnership where the partnership agreement provides that the partnership is to end on the expiry of a specified period.

Order for benefit of former partner

(1) The court may make an order under this section if-

(a) an application is made to it by a former partner, or other person interested in the winding up, who claims that the partnership business or affairs are being conducted, or wound up, in a way that is prejudicial

tohisinterests,and

(b) it is satisfied that it is just and equitable to make the order.

(2) The order may make such provision as the court thinks fit for giving relief in respect of the claim and may, in particular-

(a) require accounts to be drawn up to establish the former partner's rights

under the default rules insection 32 (realisation of former partner's

share other than on winding up) or any substitute provisions in the partnership agreement;

(b) require interim payments to be made to the former partner in respect of

such rights;

(c)require security to be provided in respect of such rights;

(d) break up the partnership;

(e) if the partnership has already broken up, give directions as to the way in which it is to be wound up.

384

EXPLANATORY NOTES

Clause 52

Historically, prospective partners have on occasion paid other prospective partners, or (in the case of a partnership which already exists) the existing partners, money when they entered into partnership. Such amounts are known as "premiums". This clause reproduces the effect of the existing law in the 1890 Act (section 40). See the report, paragraphs 13.21 - 13.22.

Clause 53

The default position under the draft Bill is that a former partner's share in the partnership is converted into a debt (clause 32) and he is indemnified by the partnership and remaining partners against any payments thereafter made in respect of partnership obligations (clause 34). However, it may be that a former partner feels unhappy at his treatment. For example, he may be aggrieved that the continuing partners are delaying in calculating his entitlement or in paying him out, that the sum which he is offered is inadequate or that the partnership may not pay up on his indemnity. In such circumstances, this clause gives him a right to apply to court for relief. The clause also gives this right to a person interested in the winding up (as defined in clause 50(5)). Subsection (3) provides that an application for an order under this section may include an application for an order appointing a partnership liquidator or provisional liquidator. The court may make a wide range of orders to give relief, including those in subsections (2) (4) and (5). See the report, paragraphs 8.40 8.48.

385

Partnerships Bill			23
Part 2 - General partnerships
	(3)	An application for an order under this section may include an application for
		an order under section 50 or 51.
	(4)	An order under this section breaking up a partnership -
		(a)	must specify the date on which the partnership breaks up,
		(b)	may be combined with an order under section 50 or 51 (whether or not	5
			such an order was applied for in accordance with subsection (3)), and
		(c)	may include such directions as the court thinks fit for giving effect to
			the order.
	(5)	Subsections (2)(e) and (4)(c) authorise, in particular, a direction restricting the
		rights conferred on a specified partner by section 43 or Schedule 4.		10
			PART 3
			LIMITED PARTNERSHIPS
			Introduction
54		Limited and general partners
	(1)	A person does not become a limited partner in a limited partnership until		15
		registered as such.
	(2)	A person does not cease to be a limited partner in a limited partnership until
		he is registered as no longer being a limited partner in the partnership.
	(3)	But subsection (2) does not apply if the person ceases to be a partner-
		(a)	on his death or (if not an individual) dissolution, or	20
		(b)	on the dissolution of the partnership.
	(4)	A general partner is a person who-
		(a)	is a partner in a limited partnership, but
		(b)	is not a limited partner.
			Limited partners and limited liability	25
55		Restricted role of limited partner
	(1)	A limited partner must not take part in the management of the partnership
		business or affairs.
	(2)	Nothing in subsection (1) prevents a limited partner from doing anything
		which is a permitted activity under Schedule 6.		30
	(3)	The Secretary of State may by order amend Schedule 6 (by adding, modifying
		or omitting an activity).
56		Limited liability of limited partner
	(1)	Subject to subsection (3) and section 57, a limited partner is not personally
		liable for any partnership obligation incurred while he is a limited partner.		35

386

EXPLANATORY NOTES

LIMITED PARTNERSHIPS

Introduction

Clause 54

The effect of subsections (1) and (2) is that whether an individual is a limited partner is determined by whether that person is registered as a limited partner or not. Subsection (3) introduces an exception to this rule, in relation to ceasing to be a limited partner involuntarily. The purpose of clause 54 is to provide maximum certainty to limited partners about when their status as a limited partner begins and ends. However, once persons are registered as limited partners they can be certain that they have limited liability unless they take part in management or withdraw their capital contribution (clauses 55 and 56). See the report, paragraphs 15.42 - 15.43.

Whether a person is a general partner in a limited partnership will not be determined by the register. This will depend upon whether that person is carrying on business together with another person in partnership (clause 1 and Schedule 1) and, if any, the relevant terms of the partnership agreement (about how general partners join the partnership). See the report, paragraphs 15.44 and 16.3 - 16.4.

Limited partners and Limited liability

Clause 55

Subsection (1) is the equivalent of the prohibition on taking part in management in section 6(1) of the 1907 Act. See the report, paragraphs 16.20 - 16.21. Subsection (2) introduces a list of 'safe' activities (listed in Schedule 6) that limited partners will be able to undertake without taking part in management. It is intended that the limited partner be excluded from day-to-day decisions and activities related to the partnership business and affairs. But a limited partner may take part in certain strategic decisions. Schedule 6 is not an exclusive list. It is there to provide the limited partner with greater certainty about the strategic decisions that a limited partner may want to be involved in. See the report, paragraphs 17.3 - 17.17.

Clause 56

The effect of subsection (1) is that a limited partner has no secondary liability unless he withdraws any part of his capital contribution. See the report, paragraphs 17 .22 - 17 .23(1) and 17.26 - 17.33. Subsection (2) is equivalent to the prohibition in section 4(3) of the 1907 Act on the limited partner withdrawing any part of their capital contribution. A limited partner is not required by the Bill to make a capital contribution (clause 13), see the report, paragraphs 17.34 - 17.36.

387

24			Partnerships Bill
			Part 3 - Limited partnerships
	(2)	While a person remains a limited partner, he is not entitled either directly or
		indirectly to draw out or receive back the whole or part of any relevant capital
		contribution made by him to the partnership.
	(3)	If he does so-
		(a)	he is personally liable under section 23(1) (subject to section 23(2)) for	5
			any partnership obligation incurred while he is a limited partner, but
		(b)	his total personal liability under section 23(1) cannot exceed the amount
			drawn out or received back.
	(4)	"Relevant capital contribution" means a capital contribution consisting of
		either or both of-		10
		(a)	a sum or sums of money, and
		(b)	property which has an agreed capital value.
57		Limited partner who has unlimited liability
		If a limited partner fails to comply with section 55, he is personally liable under
		section 23(1) (subject to section 23(2)) for-		15
		(a)	any partnership obligation incurred as a result of the non-compliance,
			and
		(b)	any other partnership obligation incurred during the period of non-
			compliance.
			Other modifications of Part 2 for limited partnerships	20
58		General application of Act to limited partnerships
		Subject to sections 59 to 61 and any other provision to the contrary, this Act
		applies in relation to limited partnerships as it applies in relation to general
		partnerships.
59		Rights and duties of the partners etc.		25
	(1)	A limited partner is not subject to the duties in-
		(a)	section 9(2)(a) and (c) (keeping partners informed and accounting for
			profits of a competing business), and
		(b)	section 15 (keeping accounting and partnership records etc.).
	(2)	Section 16 (partnership bound by acts of partners carrying on business in usual		30
		way) does not apply in relation to a limited partner.
	(3)	Subsections (4) to (7) contain default rules for a limited partnership.
	(4)	Differences about ordinary matters connected with the partnership business or
		affairs may be decided by-
		(a)	the general partner, or	35
		(b)	if there is more than one general partner, a majority of them.
	(5)	But differences about other matters connected with the partnership business or
		affairs must be decided by-
		(a)	the general partner, or
		(b)	if there is more than one general partner, all of them.	40

EXPLANATORY NOTES

Clause 57

Clause 57 describes the personal liability that arises where a limited partner takes part in management. See the report, paragraphs 17.21 and 17.23(2).

Other modifications of Part 2 for Limited partnerships

Clause 59

Limited partners are subject to the overarching duty of good faith in clause 9(1). However, the content of the duty will be narrower in scope than that applicable to general partners, in order to reflect the limited partner's more restricted role. As with the existing common law duty, the exact content will depend on the context in which it arises. See the report, paragraph 18.11.

Under subsection (1)(b), limited partners are not subject to the duties imposed by clause 15. But limited partners may still take advantage of the duty that the general partners are under to keep records and to make them available on request to any partner. Thus, a limited partner may inspect the partnership records upon request under clause 15. This replicates the right of limited partners to inspect the books contained in section 6(1) of the 1907 Act. See the report, paragraphs 18.8 - 18.12.

As with the 1907 Act a limited partner will have no inherent authority to carryon the partnership business, see the report, paragraphs 16.22 - 16.23. Under subsection (2) a partnership will be able expressly to grant a limited partner authority to bind the partnership (see subsection (6)). However, it will be up to the limited partner to ensure that by exercising that authority he does not take part in management and thereby lose the limitation on his liability.

As to subsections (4) and (5), see the report, paragraphs 16.15 - 16.16 and 16.19(1) and (2).

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Partnerships Bill			25
Part 3 - Limited partnerships
	(6)	The question whether a limited partner should be given authority to act on
		behalf of the partnership is not an ordinary matter.
	(7)	The partnership agreement cannot be varied under subsection (4) or (5) (see
		section 4).
60		Changes in partners		5
	(1)	It is a default rule for a limited partnership that a person may become a partner
		only with the agreement of-
		(a)	the general partner,
		(b)	if there is more than one general partner, all of them, or
		(c)	if there are no general partners, all the limited partners.	10
	(2)	A limited partner may not be expelled from the partnership under section 31
		(power to expel partner against whom charging order is made or whose share
		is arrested in execution).
	(3)	Nothing in section 36 (position of assignees etc. of partner's share) prevents a
		person to whom a partner has assigned the whole of his share absolutely from		15
		becoming a partner in place of the assignor if-
		(a)	the general partner agrees to the substitution or, if there is more than
			one general partner, all of them agree to it, or
		(b)	the substitution is made in accordance with the partnership agreement.
61		Break up and winding up of limited partnership		20
	(1)	It is a default rule for a limited partnership that the references to "the partners"
		in section 38(3) (default rule about break up of partnership) do not include the
		limited partners (unless there are no general partners).
	(2)	It is a default rule for a limited partnership that the responsibility for winding
		up the partnership under section 43 is that of the general partner or general		25
		partners, unless-
		(a)	the court orders otherwise, or
		(b)	there are no general partners.
	(3)	Section 50 and Schedule 4 (winding up by liquidator) and section 51 and
		Schedule 5 (provisional liquidator) apply in relation to a limited partnership		30
		with the following modifications.
	(4)	The references to "the partners" in paragraphs 3(1)(a), 4(b) and 8(2)(a) of
		Schedule 4 and paragraph 3(1) (a) of Schedule 5 (matters requiring approval of
		partners) do not include the limited partners unless-
		(a)	the partnership agreement provides otherwise, or	35
		(b)	the partnership has no general partners.
	(5)	The references to "each partner" and to "each person interested in the winding
		up" in paragraphs 10(3) and 11(3) of Schedule 4 (partners entitled to attend
		meetings) do not include the limited partners or former limited partners (or
		personal representatives of, or insolvency practitioners for, former limited		40
		partners) unless-
		(a)	the partnership agreement provides otherwise, or
		(b)	the partnership has no general partners.

390

EXPLANATORY NOTES

159.	Astosubsection(7),seethereport,paragraphs18.3-18.4and18.7.

Clause 60

The default rule in subsection (1) generally replicates the effect of section 6(5)(d) of the 1907 Act but modernises it by making the rule clearer, and also provides for a situation where a limited partnership has no general partners. See the report, paragraphs 18.5 - 18.6, 16.16 and 16.19(4). Subsection (2) adapts section 6(5)(c) of the 1907 Act to the regime where the option is expulsion rather than dissolution of the partnership. See the report, paragraphs 18.19 - 18.20. The effect of subsection (3) is that a partner who assigns his share in a limited partnership absolutely requires only the permission of the general partners and not the permission of all partners as required under clause 36(4)(a). (This does not affect an absolute assignment made in accordance with the partnership agreement - clause 60(3)(b).) See the report, paragraphs 18.16 - 18.18.

Clause 61

Subsection (1) provides that a limited partnership should break up if the general partner decides, or if there is more than one general partner at least half of them decide, or if there are no general partners at least half of the limited partners so decide. See the report, paragraphs 18.21 - 18.22.

Under subsection (2) it is the responsibility of the general partner(s) to wind up the partnership once it has broken up. See the report, paragraphs 16.17, 16.19(6), 18.23 and 18.27(1). If there are no general partners the limited partners may not want to wind up the partnership as to do so may risk involving them in the management of the partnership, exposing them to personal liability. In this case the limited partners should apply to the court under clause 50 for the appointment of a liquidator to wind up the partnership. See the report, paragraph 18.24.

Subsections (4) and (5) modify the solvent winding up regime to take account of the more limited role played by limited partners. See the report, paragraphs 18.25 - 18.27(2) and (3).

Subsections (4) and (5) have a further effect where a limited partner applies for the appointment of a liquidator. Under clause 50 a limited partner can apply for the appointment of a liquidator. The effect of subsection (5) is that the powers of a limited partner after making such an application are dependent upon whether the limited partnership has general partners or not. If the limited partnership has no general partners it is important that the remaining limited partners have the powers of general partners, for example to authorise use of the Part 2 powers in Schedule 4. So where there are no general partners in the partnership limited partners will be able to do all things that general partners could do in the context of the liquidation. However, this is not necessary where the limited partnership already has general partners, as the general partners will be able to make these decisions once a liquidator is appointed.

165. Apart from the exceptions set out in subsections (4) and (5) limited partners will be treated the same as general partners for the purposes of Schedules 4 and 5. A limited partner will be able to make an application to court under Schedule 4, paragraph 14 for example. This is because a limited partner is a 'partner' under paragraph 14(2)(a) and because nothing in clause 62 excludes the application of paragraph 14 to limited partners. See the report, paragraph 18.24.

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Partnerships Bill Part 3 - Limited partnerships

Registered office and names

Registered office

A limited partnership must-

(a) at all times have a registered office in England or Wales, or (b) at all times have a registered office in Scotland,

to which communications may be addressed.

63	Name of limited partnership

(1) The name of a limited partnership must end with (a) "limited partnership", or

(b) the abbreviation "lp" or "LP".

(2) But if the registered office of the limited partnership is in Wales, its name must end with-

(a) "limited partnership" or "partneriaeth cyfyngedig", or (b) the abbreviation "lp", "LP", "pc" or "PC".

(3)A partnership must not be registered by a name-

(a) which is the same as a name appearing in the index kept under section 714(1) of the Companies Act 1985 (c. 6),

(b) the use of which as the name of the partnership would in the opinion of the Secretary of State constitute an offence, or

(c)which in the opinion of the Secretary of State is offensive.

(4) Subsection (3)(a) does not apply if the person whose name appears in the index consents in writing to the registration of the partnership by the same name.

(5) In determining for the purposes of this section whether one name is the same as another there are to be disregarded-

(a)the definite article as the first word of the name,

(b) any of the following (or abbreviations of them) at the end of the name "limited partnership" or "partneriaeth cyfyngedig",

"limited liability partnership" or "partneriaeth atebolrwydd

cyfyngedig" ,

"company"or"cwmni",

"and company" or "a'r cwmni",

"company limited" or "cwmni cyfyngedig",

"and company limited" or "a'r cwmni cyfyngedig", "limited" or "cyfyngedig",

"unlimited"or"anghyfyngedig",

"public limited company" or "cwmni cyfyngedig cyhoeddus", "investment company with variable capital" or "cwmni

buddsoddi a chyfalaf newidiol", and

"open-ended investment company" or "cwmni buddsoddiant

penagored",and

and "and" and "&" are to be taken as the same.

392

EXPLANATORY NOTES

Registered office and nam es

Clause 62

This is a departure from the existing requirement (1907 Act, section 8) of a principal place of business in the UK at the time of registration. This clause provides that it is sufficient that a limited partnership should have a registered office in England or Wales or in Scotland. See the report, paragraphs 15.30 - 15.34 and 15.38(1).

Clause 63

Subsections (1) and (2) introduce a mandatory LP (or PC in Welsh) suffix for all limited partnerships. See the report, paragraphs 15.67-15.71. Subsections (3) - (5) impose certain restrictions on the names that can be registered. These are similar to restrictions included in the Companies Act 1985 (section 26) and the Limited Liability Partnerships Act 2000 (Schedule, paragraph 3(1), paragraph 8). See the report, paragraphs 15.64 - 15.66.

393

Partnerships Bill			27
Part 3 - Limited partnerships
64		Improper use of "limited partnership" etc.
	(1)	A person other than one of those referred to in subsection (2) commits an
		offence if he carries on a business under a name or title which includes as the
		last words-
		(a)	"limited partnership" or "partneriaeth cyfyngedig", or	5
		(b)	any contraction or imitation of either of those expressions.
	(2)	Those persons are-
		(a)	a limited partnership,
		(b)	a partner in a limited partnership,
		(c)	an oversea limited partnership, and	10
		(d)	a partner in an oversea limited partnership.
	(3)	A person guilty of an offence under subsection (1) is liable on summary
		conviction to a fine not exceeding level 3 on the standard scale.
	(4)	"Oversea limited partnership" means a partnership -
		(a)	constituted under the law of a country or territory outside Great	15
			Britain, and
		(b)	in which one or more of the partners has limited liability in respect of
			partnership obligations as a result of registration of the partnership in
			that country or territory.
65		Information to be provided on partnership documents		20
	(1)	The name of a limited partnership, and the address of its registered office, must
		be stated on any partnership document.
	(2)	"Partnership document" means-
		(a)	a business letter,
		(b)	a written order for goods or services to be supplied to the partnership,	25
		(c)	an invoice or receipt issued in the course of the partnership business, or
		(d)	a written demand for payment of a debt arising in the course of the
			partnership business.
	(3)	Any general partner who without reasonable excuse fails to ensure that
		subsection (1) is complied with is guilty of an offence and liable on summary		30
		conviction to a fine not exceeding level 3 on the standard scale.
			Registration
66		Application for registration
	(1)	For a partnership or proposed partnership to be registered as a limited
		partnership, an application for its registration must have been delivered to the		35
		registrar .
	(2)	The application must-
		(a)	specify the name under which the limited partnership is to be
			registered and, if section 63(4) applies, contain the written consent
			referred to there,	40
		(b)	contain the necessary registration details, and
		(c)	be signed by-

394

EXPLANATORY NOTES

Clause 64

Clause 64 restricts and protects the use of the LP suffix. See the report, paragraphs 15.76 15.78. A similar provision exists in the Companies Act 1985 (section 34) and the Limited Liability Partnerships Act 2000 (Schedule, paragraph 7). The effect of the definition in subsection (4) is that if a business vehicle is registered in its home country as a limited partnership or the equivalent to a limited partnership, it will be an 'oversea limited partnership'. This will allow that partnership to use the LP name and suffix when trading in Great Britain. Recognition of an oversea limited partnership for the purposes of allowing use of the LP suffix and name 'limited partnership' does not constitute recognition of its status as a limited partnership for other purposes such as tax treatment.

Clause 65

This clause sets out the information to be provided on partnership documents. There is a distinction between limited partnerships that trade under their registered name and those limited partnerships that trade under a different name. If a limited partnership trades under its registered name clause 65 sets out the information that must be provided on 'partnership documents', and defines this term by specifying the documents which must contain this information.
If a limited partnership trades under a name that is different to its registered name, in addition to being subject to the draft Bill, it is also subject to the Business N ames Act 1985. This will mean that the limited partnership will have to comply with the requirements of clause 65, as well as with the additional requirements of the Business Names Act 1985 that relate to the provision of information.Thus, clause 65 applies to all limited partnerships, whether they trade under their registered name or not.
The definition of 'partnership document' in subsection (2) of clause 65 is the same as that contained in the Business Names Act 1985 (section 4(1)(a)). This is to simplify compliance for those limited partnerships that must comply with both the draft Bill and the Business Names Act 1985. See the report, paragraphs 15.69 - 15.70, 15.71(3), 16.17 and 16.19(5).

Registration

Clause 66

A partnership does not become a limited partnership until it is registered as such. Clause 66 sets out the information that must be provided in an application for registration. This clause is similar to section 8 of the 1907 Act. See the report, paragraphs 15.35 - 15.37 and 15.38(2). Limited partners are not required to sign the application for registration. See the report, paragraphs 16.9 and 16.14(1).
Under the Financial Services and Markets Act 2000 (FSMA) and article 51 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 only an authorised person may "establish, operate and wind up" a collective investment scheme. Many limited partnerships whose core business is investment constitute collective investment schemes under the FSMA. In most cases the general partner of the limited partnership is not an authorised person. In those cases the partnership appoints an authorised person to operate the partnership. See the report, paragraph 16.12. To accommodate limited partnerships that are being operated by an authorised person we have, in several provisions, provided for a person (other than the general partner) to be able to do things that the general partner is required to do, as long as that person has authority from the partnership, see for example Schedule 7, paragraphs 1(3), 2(3), 3(4), 4(4),5(2) and 6(1) and Schedule 8, paragraph 1(4).

395

28					Partnerships Bill
					Part 3 - Limited partnerships
			(i)		the proposed general partner, or
			(ii)		if there is more than one proposed general partner, all of them.
	(3)	The application contains the necessary registration details if it states-
		(a)	the name and address of the proposed general partner (or, if there is
			more than one, of all of them);			5
		(b)	the name of each proposed limited partner and the amount of any
			relevant capital contribution being made by him to the partnership;
		(c)	whether the registered office of the limited partnership is to be in
			England or Wales, or in Scotland;
		(d)	what is to be the address of the registered office;			10
		(e)	if the application relates to a partnership (rather than a proposed
			partnership), the date of its formation.
67		Registration and registration certificate
	(1)	On receiving an application for the registration of a partnership or proposed
		partnership as a limited partnership, the registrar must, if satisfied that				15
		sections 62, 63 and 66 are complied with-
		(a)	register it as a limited partnership, and
		(b)	supply it with a registration certificate signed by him.
	(2)	The registration certificate must record-
		(a)	the name of the limited partnership (as specified in the application for			20
			registration),
		(b)	the fact of its registration as a limited partnership, and
		(c)	the date of registration.
	(3)	If the partnership to which the application relates has not been formed before
		registration, the partnership is formed when it is registered.				25
68		Registration of changes, deregistration and other matters
	(1)	Schedule 7 makes provision about making changes and corrections to the
		register.
	(2)	Schedule 8 makes provision about the deregistration of limited partnerships.
	(3)	Schedule		9 makes provision about the administration of the registration		30
		system.
69		Offences of providing false information
	(1)	A person is guilty of an offence if he provides, or knowingly causes or
		knowingly allows to be provided, in an application under section 66 or
		paragraph 1 of Schedule 8 information which-				35
		(a)	he knows to be false, or
		(b)	he is aware may be false.
	(2)	A person is guilty of an offence if he provides, or knowingly causes or
		knowingly allows to be provided, in a notice to the registrar under Schedule 7
		information which-				40
		(a)	he knows to be false, or
		(b)	he is aware may be false.

396

EXPLANATORY NOTES

We have not, however, allowed the authorised person to sign the application for registration under clause 66(2). This is because in most cases there will be no partnership in existence prior to the application for registration under clause 66. Thus, in most cases, there will be no partnership in existence to authorise a person to act on its behalf for the purposes of the FSMA. In order to ensure that this does not lead to the general partner being liable under the FSMA for "establishing" a collective investment scheme we are recommending a consequential amendment to the FSMA to the effect that the act of registering a limited partnership does not constitute "establishing" a collective investment scheme. See the report, paragraph 16.12 (footnote 14).

Clause 67

A partnership will become a limited partnership on the date it is added to the register. See the report, paragraphs 15.16 - 15.17 and 15.21. If a pre-existing general partnership has applied to become a limited partnership, the partnership will be a limited partnership from this date. If no partnership existed prior to the application for registration a new limited partnership will be formed on this date. This is achieved by subsection (3). See the report, paragraphs 16.27 - 16.29.

Clause 69

The offence of providing false information will apply to any person making an application under clause 66 or paragraph 1 of Schedule 8 or delivering a notice under Schedule 7. This will encompass both general partners as well as authorised persons under the FSMA (see the notes above on clause 66) who are able to make applications or deliver notices on behalf of the partnership. The clause also covers a situation where an authorised person registers false information thinking it is correct, that information having been given to the authorised person by someone in the partnership who knew it was false. In this case the person providing the false information, knowing it was false, would be guilty of the offence. See the report, paragraphs 16.31 - 16.32.

397

Partnerships Bill

Part 3 - Limited partnerships

(3) A person guilty of an offence under subsection (1) is liable-

(a) on summary conviction, to imprisonment for a term not exceeding 6 months or a fine not exceeding the statutory maximum, or to both, or (b) on conviction on indictment, to imprisonment for a term not exceeding

two years or a fine, or to both.

(4) A person guilty of an offence under subsection (2) is liable on summary conviction to imprisonment for a term not exceeding 6 months or a fine not exceeding level 5 on the standard scale, or to both.

Supplementary

Offences by bodies corporate

(1) If an offence under this Part committed by a body corporate is proved-

(a) to have been committed with the consent or connivance of an officer of the body corporate, or

(b) to be attributable to neglect on the part of an officer of the body

corporate.

the officer as well as the body corporate is guilty of the offence and liable to be proceeded against and punished accordingly.

(2) If the affairs of a body corporate are managed by its members, subsection (1) applies in relation to the acts and defaults of a member in connection with his

functions of management as if he were a director of the body.

(3) "Officer" includes-

(a) a director, manager or secretary, and

(b) a person purporting to act as a director, manager or secretary.

Evidence

(1)A certificate of the registration of a partnership is conclusive evidence that-

(a) the requirements of this Part relating to registration, and to matters precedent and incidental to it, have been complied with,

(b) the partnership was registered as a limited partnership on the date stated in the certificate, and

(c)its partnership name is as specified in the certificate.

(2) A certificate of a change in the name of a partnership is conclusive evidence that-

(a) the partnership was registered as having a new name on the date specified in the certificate, and

(b)its partnership name is as specified in the certificate.

(3) A copy of or extract from an original document sent to the registrar under this Part, if signed by the registrar, is in all legal proceedings admissible in evidence as of equal validity with the original document.

72	Interpretation of Part 3

(1) In this Part-

"address", in relation to a partner in a partnership, means-

398

EXPLANATORY NOTES

Supplem entary

Clause 70

It is anticipated under the draft Bill that bodies corporate may be partners. For example, a company may be a partner in a general partnership, and a company is commonly the general partner in a limited partnership. Where a body corporate commits an offence (for example, a body corporate partner) this clause sets out the element of consent or neglect required for an officer of that body corporate to be prosecuted for the offence along with the body corporate itself. See the report, paragraphs 16.33 - 16.34.

Clause 71

This clause sets out the status of the certificate of registration. See the report, paragraphs 15.24 -15.25. Sub-paragraph (3) is similar in effect to section 16(2) of the 1907 Act.

Clause 72

This clause deals with interpretation. As it is possible that, in the future, individuals will be allowed to submit documents to the registrar electronically, subsection (2) has been included to allow for this. See the report, paragraph 15.56, footnote 38.

399

Partnerships Bill Part 3 - Limited partnerships

(a) for an individual, his usual residential address,

(b) for a company or a limited partnership under this Part, its registered office, and

Part,its principal place of business;

"the Gazette", in relation to the deregistration of a limited partnership, means -

(a) if the partnership is registered in Scotland, the Edinburgh Gazette;

(b)otherwise, the London Gazette;

"name", in relation to a partner in a partnership, means-

(a) for an individual, his forename and surname (or, in the case of a peer or other person usually known by a title, his title instead of or in addition to either or both of his forename and surname),

and

(b) for a corporation or a partnership having legal personality, its corporate or partnership name;

"the registrar" means-

(a) if the registered office is, or is to be, in England or Wales, the

registrar or other officer performing under the Companies Act

1985 (c.6) the duty of registration of companies having registered offices in England or Wales, and

(b) if the registered office is, or is to be, in Scotland, the registrar or other officer performing under that Act the duty of registration

of companies having registered offices in Scotland;

"relevant capital contribution" has the meaning given by section 56(4).

(2) For the purposes of this Part, the signing of a document by a person includes (a) in the case of a document required to be delivered to the registrar, ensuring that it is authenticated in a manner approved by the registrar,

and

(b) in the case of a document required to be signed by the registrar, authenticated by the registrar's official seal.

PART 4

SPECIAL LIMITED PARTNERSHIPS

Special limited partnerships (England and Wales)

(1) This Part provides for a kind of limited partnership to be known as a special limited partnership.

(2) A special limited partnership is not a legal person.

(3) This Act applies in relation to a special limited partnership as it applies in

relation to a limited partnership but with modifications and additional

provisions set out in Schedule 10.

400

Partnerships Bill

Part 5 - Supplementary

PART 5

SUPPLEMENTARY

Disclosure of information about partners etc.

74	Disclosure of names and addresses of partners

(1)A person dealing with a partnership is entitled, on request to the partnership

or a partner, to be informed of-

(a) the full name of each partner, and

(b) an address for service of each partner.

(2) A person who has a complaint against a partnership connected with dealings

he has had with the partnership is entitled, on request to the partnership, a

partner or a former partner, to be given such information as the person requested is reasonably able to provide (or to obtain) as to-

(a) the full name of each person who was a partner at the time of the act or omission to which the complaint relates, and

(b)an address for service, or the last known address, of each such person.

(3) Rules of court may make provision enabling a person who is considering (a) making a claim against a partnership, or

(b) making a claim against a partner or former partner in respect of a partnership obligation,

to apply to the court, before bringing proceedings in respect of the claim, for an

order for the disclosure of the information mentioned in subsection (1) or (2).

75	Business Names Act 1985

Schedule 11 contains amendments of the Business Names Act 1985 (c. 7).

Interpretation

(1) In this Act-

"assignment", in relation to Scotland, means assignation; "business" has the meaning given by section 1(6);

"the court" means -

(a)in relation to England and Wales, the High Court or a county

court and includes, in relation to the High Court, a judge of that court, and

(b) in relation to Scotland, the Court of Session or the sheriff; "default rule" has the meaning given by section 5(1);

"enactment" includes any provision of, or of any instrument made under,

an Act of the Scottish Parliament, any provision of, or of any instrument made under, Northern Ireland legislation and any provision of subordinate legislation (within the meaning of the Interpretation Act 1978 (c. 30));

"losses"includes losses of a capital nature;

"partnership" has the meaning given by section 1(2);

402

EXPLANATORY NOTES

SUPPLEMENTARY

Disclosure of inform ation about partners etc.

Clause 74

A third party may deal with a partnership without knowing the identity of its partners or their addresses. Unlike a limited company, a partnership is not required to file such information on a publicly accessible register. If a dispute arises, the third party will need to know such information. The Business Names Act 1985 requires partners to reveal some such information to third parties in various circumstances. There are also in England and Wales rules of court which enable litigants to obtain such information. In Scotland also there are procedures to obtain such information. What is lacking in the current law is a legally enforceable civil obligation owed by the partnership, its partners or former partners to persons who are dealing or have dealt with the partnership, to reveal the names of the partners and addresses at which they may be reached. This clause provides such a right. See the report, paragraphs 7.30 - 7.31.

Clause 75

This clause introduces Schedule 11 which contains amendments to the Business Names Act 1985. See the notes to that Schedule for an explanation of these changes.

Interpretation

Clause 76

Subsection (1) defines various expressions used in the draft Bill.

403

Partnerships Bill Part 5 - Supplementary

"partnership agreement" has the meaning given by section 1(1); "partnership of defined duration" means a partnership where the partnership agreement provides that the partnership is to end-

(a) on the expiry of a specified period, or

(b)on the accomplishment of a venture that the partnership was

formed to undertake;

"partnership obligation" has the meaning given by section 23(6); "partnership property" has the meaning given by section 17(1);

"person interested in the winding up" has the meaning given by section

50(5);

"the prescribed rate" means-

(a) 3% above the base rate, or

(b) such other rate of interest as may be prescribed by an order made by the Secretary of State;

and"thebaserate"means the interest rate set by the Bank of England

which is used as the basis for other banks' rates;

"principal place of business" means, in the case of a partnership with only one place of business, that place;

"profits" includes profits of a capital nature;

"property"includes money and all other property, real or personal,

heritable or moveable, including things in action and other intangible or incorporeal property;

"trust property" means-

(a) in relation to England and Wales, property which is held in the

partnership name but to which the partnership is not

beneficially entitled, and

(b) in relation to Scotland, property held by the partnership in trust; "week" means any consecutive period of seven days.

(2) In this Act any reference to an agreement (or to the terms of an agreement)

includes a reference to an agreement (or to terms) established by conduct.

(3) In this Act any reference to the time at which a partnership obligation is incurred is to be read in accordance with section 23(7).

Final provisions

77 Regulations and orders etc.

(1)Any power to make regulations, orders or rules conferred by this Act is

exercisable by statutory instrument.

(2) Any such instrument, apart from one made under section 78 or 80(2), is subject to annulment in pursuance of a resolution of either House of Parliament.

(3) No order may be made under section 78 unless a draft of the statutory

instrument containing the order (whether or not together with other

provisions) has been laid before, and approved by a resolution of, each House of Parliament.

404

EXPLANATORY NOTES

There are a number of references in the draft Bill to agreement between partners, or prospective partners. For example, clause 1 requires all the prospective partners to agree before a partnership is formed. The effect of subsection (2) of clause 76 is that such agreements need not be a result of a formal vote, or indeed be something which the parties expressly consider at all. Such agreements may instead be inferred from the parties' actions. See the report, paragraphs 4.18 - 4.20.

Subsection (3) highlights the generally applicable definition of when a partnership obligation arises in clause 23(7). For the reasons for that definition, see the note on that clause.

Final provisions

Clause 77

This clause governs the way in which secondary legislation will be made under the draft Bill and the level of Parliamentary scrutiny it will receive.

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Partnerships Bill				33
Part 5 - Supplementary
78		Consequential amendments
	(1)	The Secretary of State may by order make such amendments or repeals in any
		other Acts as he thinks necessary or expedient in consequence of, or in
		connection with, any provision of this Act.
	(2)	An order under			this section may make different provision for different	5
		purposes.
79		Transitional provisions
	(1)	Subject to the following provisions of this section, this Act does not apply to
		partnerships ("existing partnerships") which, immediately before the day
		appointed under section 80(2), were-				10
		(a)	subject to the Partnership Act 1890 (c. 39), or
		(b)	registered under the Limited Partnerships Act 1907 (c. 24).
	(2)	The Secretary of State may by order make such transitional provisions and
		savings as he considers appropriate in connection with the coming into force
		of this Act or of any provision of an order under section 78.				15
	(3)	The order may, in particular, make provision for-
		(a)	this Act (or prescribed provisions of it) to apply (with or without
			modifications) to existing partnerships (or those within a prescribed
			class) after the end of the transitional period;
		(b)	an existing partnership (or one within a prescribed class) to elect at any			20
			time during the transitional period to be subject to the provisions (or
			prescribed provisions) of this Act (with or without modifications);
		(c)	an existing partnership (or one within a prescribed class) to be treated
			as not having come to an end as a result of the fact that during the
			transitional period a person-			25
			(i)	ceases to carry on business with two or more existing partners,
				or
			(ii)	is admitted to the partnership;
		(d)	any provisions of the 1890 or 1907 Acts to be treated (with or without
			modifications) as being, after the end of the transitional period or after			30
			an election under paragraph (b), default rules in relation to an existing
			partnership (or one within a prescribed class);
		(e)	any existing partnership which has been registered under the 1907 Act
			(or one within a prescribed class) to be treated as registered as a limited
			partnership or a special limited partnership under this Act.			35
	(4)	"The transitional period" means the period of two years beginning with the
		day appointed under section 80(2).
	(5)	"Prescribed" means prescribed by the order.
80		Short title, commencement and extent
	(1)	This Act may be cited as the Partnerships Act 2003.				40
	(2)	This Act (except sections 78 and 79 and this section) comes into force on such
		day as the Secretary of State may by order appoint.
	(3)	The following provisions extend only to England and Wales-
		(a)	section 8 (incapacity to commit offences),

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EXPLANATORY NOTES

Clause 78

The introduction of separate legal personality will require a number of consequential amendments. See the report, paragraph 3.58. This clause enables such amendments to be made without further primary legislation.

Clause 79

The draft Bill will apply to all partnerships formed after it comes into force. But what of partnerships and limited partnerships which already exist at that date? This clause enables the Secretary of State to make an order specifying how they are to be treated (subsection (2)). The reason that these provisions will be made by order at a later date and are not contained in their final form in the draft Bill is that there are a number of details which will depend on the circumstances prevailing when the legislation comes into force. For example, the order will vary according to whether a similar piece of legislation has been passed for Northern Ireland.

This clause does, however, set out the main features of the transitional provisions which will be finalised in secondary legislation (subsections (3) and (4)). In summary, the draft Bill will apply to all pre-existing partnerships, at the latest, two years after it comes into force. Before then, a partnership will be entitled to renounce the default rules in the draft Bill, and to adopt instead equivalent provisions of the 1890 Act or 1907 Act. The details of any elections required to bring this about will be specified in the secondary legislation. See report, Part XIV.

Clause 80

This clause deals with the short title (ie the name by which the draft Bill will be known once it receives Royal Assent), commencement (ie the time at which the provisions of the Bill come into force, which may be later than the time at which it receives Royal Assent) and extent.

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(b) section 20 (execution of deeds),

not requiring valuable consideration),

(d) section 46 (order charging partner's share),

(e)Part 4 (special limited partnerships),

(f) paragraphs 1 to 3 of Schedule 2 (partner's secondary liability: limitation), and

(g) paragraph 7 of Schedule 4 (winding up by liquidator: disclaimer).

(4) The following provisions extend only to Scotland-

(a)section 21 (validity of documents signed by partnerships),

(b) section 37 (position where partner's share is arrested in execution),

(d) paragraph 8 and Part 4 of Schedule 4 (winding up by liquidator:

termination of leases and liquidator's powers relating to sequestration

of partnership's estate etc.).

(5) Any order under section 78 or 79 may provide for any provision of it to have the same extent as the legislation it affects.

(6) Otherwise, this Act extends only to Great Britain.

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SCHEDULES

SCHEDULE 1

Section 1

WHETHER PERSONS ARE CARRYING ON BUSINESS TOGETHER

A person does not carry on a business with another merely because-

(a) he receives a payment contingent on or varying with the profits of a business,

(b) he is an agent of a person engaged in a business and has a contract for his remuneration by a share of the profits of the business,

(c) he receives a debt or other liquidated amount (by instalments or otherwise) out of the accruing profits of a business,

(d) he is the beneficiary of the estate of a person who has died and receives by way of annuity a share of profits made in a business in which the deceased was a partner,

(e) he lends money to a person engaged in or about to engage in a business and under the contract for the loan is to receive a rate of interest varying with the profits of the business or a share of those profits,

(f) he sells the goodwill of a business and receives (by way of annuity or

otherwise) a share of the profits of the business in return for the sale.

A person does not carry on a business with another merely because they share an interest in property (whether or not they share profits made by the use of the property).

A person does not carry on a business with another merely because they share gross profits (whether or not they have a joint or common interest in any property from which, or from the use of which, the returns are derived).

SCHEDULE 2

Section 25

PARTNER'S SECONDARY LIABILITY: LIMITATION AND PRESCRIPTION

Limitation (England and Wales)

1	The Limitation Act 1980(c.58) is amended as follows.

After section 10 insert-

"lOA Special time limit for secondary liability of partners

(1) An action to hold a partner personally liable under section 23(1) of the Partnerships Act 2003 for a partnership obligation shall not be brought after-

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Partnerships Bill Schedule 2 - Partner's secondary liability: limitation and prescription

(a) the date of the expiration of the period of limitation (if any) applicable under this Act to an action against the partnership in respect of the partnership obligation, or

(b) if later, the expiration of two years from the date of judgment

against the partnership establishing the amount of the

partnership obligation.

(2) Subsection (1) (b) applies-

(a) whether or not there is an appeal against the judgment, and (b) whether or not execution of the judgment is stayed.

(3) Subsection (1) applies to a former partner as it applies to a partner. (4) This section does not apply in relation to a special limited partnership."

In section 9(2), after "10" insert "or lOA".

Prescription (Scotland)

The Prescription and Limitation (Scotland) Act 1973 (c. 52) is amended as follows.

5	After section SA insert-

"8B Extinction of obligations arising from secondary liability of partners (1) If any obligation of a partner (including a former partner) arising

from personal liability under section 23(1) of the Partnerships Act

2003 has subsisted for the period described in subsection (2) -

(a) without any relevant claim having been made in relation to the obligation; and

(b) without the subsistence of the obligation having been

relevantly acknowledged;

then as from the expiration of that period the obligation shall be extinguished.

(2) The period referred to in subsection (1) is the continuous period (a) beginning with the date on which decree is awarded against

the partnership in respect of the partnership obligation from

which the partner's liability arises, and

(b) expiring on whichever of the following dates is the later-

(i) the date on which any prescriptive period applicable to that partnership obligation would have expired but

for the making of the relevant claim in the

proceedings in which the decree was awarded against the partnership, or

(ii) the second anniversary of the date referred to in paragraph (a) above.

(3)Insubsection(2),the references to "decree" include an award in

arbitral proceedings.

(4) Subsections (4) and (5) of section 6 of this Act apply for the purposes of this section as they apply for the purposes of that section."

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In section 9-

(a) in subsection (1), for "and 8A" (in both places) substitute ", 8A and 8B",

(b) in subsection (3), for "or 8A" substitute ", 8A or 8B".

In section 10, in each of subsections (1), (2)(a) and (3), for "and 8A" substitute ", 8A and 8B".

8	Insection13,for"or8A"substitute",8Aor8B".

9 10

In section 14(1)(b), after "8A" insert "or 8B".

In section 15(1), in the definition of "prescriptive period", for "or 8A" substitute ", 8A or 8B".

SCHEDULE 3

Section 47

ORDERS UNDER SECTION 47: SUPPLEMENTARY PROVISIONS

Order to specify date of removal or break up

1	(1)An order under section 47 must specify the date on which-

(a) the person ceases to be a partner, or

(b) the partnership breaks up.

(2) In the case of an order under section 47(1) (b), the date specified may be (a) the date on which the applicant became a partner, or

(b) any later date.

Combination orders

2	(1)Anapplication for an order under section 47(1)(c) may include an

application for an order under section 50 or 51.

(2) An order under section 47(1)(c) may be combined with an order under section 50 or 51 whether or not such an order was applied for in accordance

withsub-paragraph(1).

Directions

3	(1)The court may by an order under section 47 give such directions as it thinks

fit for giving effect to the order, including, in particular-

(a) directions as to the rights of a specified partner to realise his share in

thepartnership,and

(b) in the case of an order under section 47(1)(c), a direction restricting the rights conferred on a specified partner by section 43 or Schedule 4 (winding up).

(2) If an order under section 47(1)(b) specifies that the applicant ceases to be a

partner from a date before the date of the order, the court may by the order

give such directions as it thinks just and equitable for putting the applicant and other persons-

(a) in the position they would have been in if the partner had in fact ceased to be a partner on that date, or

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38	Partnerships Bill

Schedule 3 - Orders under section 47: supplementary provisions

(b) so near that position as the court considers just and equitable.

Fraud, misrepresentation or non-disclosure

4	(1)Sub-paragraphs(2)and(3)apply,subject to paragraph 3(1), if the ground on

which the court makes an order under section 47 is that of fraud,

misrepresentation or non-disclosure by a partner ("the partner at fault").

(2) Each applicant for the order is entitled to be indemnified by the partner at fault in respect of any loss suffered by the applicant which is attributable to the fraud, misrepresentation or non-disclosure.

(3) If the order is made under section 47(1) (c), each partner not at fault is entitled

on a distribution of partnership assets to be paid any amount which the

partnership owes to him before any amount is paid to the partner at fault.

(4) Subject to paragraph 3(1)(a) and sub-paragraphs (2) and (3), a partner who ceases to be a partner under an order made under section 47 retains any rights he would otherwise have had to realise his share in the partnership.

Meaning of "non-disclosure"

In section 47 and this Schedule "non-disclosure" means breach of a duty of disclosure -

(a) under section 9(2)(a) or 10, or

(b) under the default rule in section 15(2)(b) or any substitute provision in the partnership agreement.

SCHEDULE 4

Section 50

WINDING UP BY LIQUIDATOR

PART 1

GENERAL

Effect ofliquidator's appointment

1	(1)On the appointment of a liquidator, all the powers of the partners cease,

except so far as the liquidator sanctions their continuance.

(2) Each partner and each person interested in the winding up must cooperate with the liquidator in relation to the winding up.

(3)In relation to the winding up by the liquidator, the duty imposed bys ection

9 (overriding duty of good faith) applies not only to a partner but also to a person interested in the winding up.

General duties of liquidator

The liquidator must-

(a) get in and realise the partnership property,

416

EXPLANATORY NOTES

Schedule 4

This Schedule contains various provisions about the operation of a new scheme for the winding up of solvent partnerships. It is designed to make the winding up of solvent partnerships simpler and more efficient than is the case under the current law, where the partners are not able or willing to wind up the partnership business themselves. See Clause 50 and the report, paragraphs 12.26 - 12.30 and 12.45 - 12.48.

Part 1

Paragraph 1 provides for the principal effects of the liquidator's appoin tmen t. In particular, the effect of sub-paragraph (1) is to put the liquidator in charge. A liquidator will often be appointed in circumstances in which the partners have fallen out. The intention is that the liquidator will come to his own view on the best way to proceed, and partners will be obliged to co-operate (sub-paragraph (2)). Partners who do not accept the liquidator's decisions will have the power to apply to court under paragraph 13. But the court is likely to need very good reasons before interfering with the view reached by the liquidator. See the report, paragraphs 12.61 - 12.66.

Paragraph 2 sets out the liquidator's duty to collect, distribute and transfer the partnership's assets. See the report, paragraphs 12.67 - 12.68.

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(b) pay the debts and discharge the liabilities of the partnership in accordance with the default rule in Step 2 of section 44(3) (whether or not the partnership agreement provides otherwise),

to5ofsection44(3)or any substitute provisions in the partnership

agreement, and

(d) secure that all trust property is transferred to (i) the person entitled to the property, or (ii) a trustee for that person.

General powers of liquidiltor

3	(1)The liquidator may-

(a) with the approval of each of the partners, or (b) with the sanction of the court,

exercise any of the powers specified in Part 2 of this Schedule.

(2)The liquidator may exercise any of the powers specified in Part 3 of this

Schedule.

Distribution of partnership property to partners etc. in its existing form

The liquidator may-

(a) if so permitted by the partnership agreement, (b) with the approval of each of the partners, or (c) with the sanction of the court,

sell or transfer, according to its estimated value, to a partner or a person interested in the winding up any particular partnership property in its existing form.

Contracts entered into by liquidator

5	(1)A contract entered into by the liquidator in the performance of his functions

is to be taken to be entered into by him on behalf of the partnership, unless the contract provides that he should be personally liable on it.

(2) If the liquidator assumes personal liability under the contract, he is entitled

to an indemnity out of partnership property in respect of that liability.

(3) This paragraph does not-

(a) limit any right to indemnity which the liquidator would have apart from it,

(b) limit his liability on contracts entered into in breach of this Schedule

or an order of the court, or

Court's power to vest property in liquidiltor

6	(1)On the application of the liquidator, the court may by order direct that all or

any part of the partnership property is to vest in the liquidator by his official

name.

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EXPLANATORY NOTES

Paragraph 3 divides the liquidator's powers into those he may exercise with the approval of the partners (or with the sanction of the court) and other powers which he may exercise without any such approval (or sanction). The former are set out in Part 2 of Schedule 4 and the latter in Part 3 of Schedule 4. The powers in Part 3 are wide. This is to enable the liquidator to fulfil his role of resolving partnership conflicts during a winding up. Partners do continue to have unlimited liability for the debts of the partnership, so they are given some protection in relation to the exercise of powers in Part 2, which the liquidator can normally only exercise with the partners' agreement. Note, however, that if partners unreasonably refuse to approve a particular proposal, the liquidator may ask the court to sanction it, notwithstanding the opposition of some or all the partners. See the report, paragraphs 12.71 - 12.76 and 12.78(1).

Paragraph 4 enables the partnership liquidator, in certain circumstances, to distribute the partnership property in its existing form (in specie) rather than realising the property and distributing the proceeds. See the report, paragraphs 12.77 and 12.78(2).

Paragraph 5 establishes, as a general rule, that a partnership liquidator is not personally liable on a contract which he enters into in performing his functions. Where he does assume personal liability, he is entitled to an indemnity out of partnership property. See the report, paragraphs 12.69 - 12.70.

While it should not be necessary, as a general rule, to vest partnership property in the liquidator, there may be circumstances where the partnership liquidator might find it useful to take title to all or part of the partnership property. Paragraph 6 allows him to apply to the court for such an order. See the report, paragraphs 12.62 and 12.66(4).

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Partnerships Bill Schedule 4 - Winding up by liquidator Part 1 - General

(2) If the court makes such an order, the property to which the order relates vests accordingly.

(3) The liquidator may, after giving such indemnity (if any) as the court may direct, bring or defend in his official name any action or other legal

proceeding-

(a) which relates to that property, or

(b) which it is necessary to bring or defend for the purpose of effectually winding up the partnership and recovering partnership property.

Disclaimer (England and Wales only)

7(1)This paragraph applies to a partnership which is being wound up in

England and Wales.

(2) The Secretary of State may by regulations make provision conferring on the liquidator power to disclaim onerous property.

(3) The regulations may, in particular, make provision-

(a)as to what constitutes onerous property,

(b) about the procedure for disclaiming property,

(c) as to the effect of the disclaimer (with respect to the partnership and to persons affected by the operation of the disclaimer), and

(d) conferring on the court powers in relation to property which is

disclaimed.

Termination of leases (Scotland)

8	(1)This paragraph applies to a partnership which is being wound up in

Scotland.

(2) Where either of the conditions specified in sub-paragraph (3) is satisfied in

relation to an interest of the partnership as tenant under a lease, the

liquidator may-

(a) with the approval of each of the partners, or (b) with the sanction of the court,

terminate the lease so far as relating to that interest by giving notice in

writing to the landlord.

(3) The conditions are-

(a) that, at any time, the liquidator-

(i) is satisfied that a provision in the lease or a rule of law prevents the disposal of the interest by the liquidator, and

(ii) so informs the landlord, and

(b) that the interest is not disposed of within the period of one year from the date of the liquidator's appointment.

(4) The period of notice terminating the interest is to be (a) in the case of an agricultural lease-

(i) a period of not less than one year and not more than two

years ending with such term of Whitsunday or Martinmas as may be specified in the notice, or

(ii) such period as may be agreed between the liquidator and the landlord,

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(b) in the case of any other lease, a period of 6 months or such shorter period of notice applying to the termination of the lease by virtue of any other enactment.

(5) This paragraph-

(a) has effect despite any provision in the lease, or any rule ofl aw, which

would otherwise prevent or restrict termination of the lease by the liquidator, and

(b) does not affect any claim by a person for compensation or damages in respect of the termination under this paragraph of the lease (or any

rightsunderit).

(6) A claim for such compensation or damages is to be treated as a claim against the partnership and not against the liquidator personally.

(7) "Agricultural lease" means-

(a) a lease of a holding within the meaning of the Small Landholders

(Scotland)Acts1886to1931,

(b) a lease of a croft within the meaning of section 3(1) of the Crofters (Scotland) Act 1993 (c. 44), or

(ii) a short limited duration tenancy, or

(Hi) a limited duration tenancy,

within the meaning of the Agricultural Holdings (Scotland) Act 2003 (asp 11).

(8) "Lease" includes a sub-lease.

Effect of partnership's insolvency

9	(1)This paragraph applies if-

(a) the partnership is unable to pay its debts, and

(b) there is no reasonable prospect of its becoming able to pay its debts.

(2) For this purpose, a partnership is to be taken to be unable to pay its debts if-

(a)it is unable to pay its debts as they fall due, or

(b) the value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.

(3) The liquidator must-

(a) apply to the court for a winding-up order to be made against the

partnership under a provision of the Insolvency Act 1986(c.45) (as

applied by an order under section 420 of that Act (insolvent partnerships)), or

(b) petition the court for sequestration of the estate of the partnership under the Bankruptcy (Scotland) Act 1985 (c. 66).

(4)Butsub-paragraph(3)does not apply if the liquidator has reasonable

grounds for believing that the court does not have jurisdiction-

(a) to make a winding-up order against the partnership under a provision of the 1986 Act (as applied), or

(b) in respect of the sequestration of the estate of the partnership under

the1985Act.

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Partnerships Bill Schedule 4 - Winding up by liquidator Part 1 - General

(5) If sub-paragraph (4) applies, the liquidator must apply to the court for directions and such order as it thinks fit.

(6) An application (or petition) under sub-paragraph (3) or (5) must be made (or presented) by the liquidator not later than one month after the day on which

this paragraph starts to apply.

(7) The application (or petition) must contain a statement as to the partnership

business and affairs, including-

(a) particulars of the partnership's assets, debts and liabilities, (b) a summary of the liquidator's receipts and payments,

(c)the names and addresses of the partnership's creditors,

(d) the securities held by them respectively, and

(e) the dates when the securities were respectively given.

(8) If the liquidator fails without reasonable excuse to comply with this paragraph -

(a)he is guilty of an offence and liable on summary conviction to a fine

not exceeding level 5 on the standard scale, and

(b) he is liable for any resulting loss suffered by a partner, a person interested in the winding up, or a creditor of the partnership.

Annual accounts

10(1) If the winding up by the liquidator will continue for more than one year, he

must prepare a full and true account of (a) his acts and dealings, and

(b) the conduct of the winding up, during the year.

(2)He must summon a partnership meeting for the purpose of-

(a) laying the account before the meeting, and (b) giving an explanation of it.

(3) The persons entitled to attend the meeting are (a) each partner, and

(b)each person interested in the winding up.

(4) The meeting must be held-

(a) at the end of the first year from the date of his appointment, and of each succeeding year, or

(b) at the first convenient date within 3 months from the end of the year.

(5)If the liquidator fails to comply with this paragraph, he is guilty of an offence

and liable on summary conviction to a fine not exceeding level 3 on the standard scale.

Final accounts

11 (1) When the liquidator has, to the best of his knowledge and belief, complied

withparagraph2,he must prepare a full and true account of the conduct of

the winding up showing, in particular-

(a) a summary of his receipts and payments, and

(b) how the partnership property and trust property has been disposed of.

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(2) He must then summon a partnership meeting for the purpose of (a) laying the account before the meeting, and

(b) giving an explanation of it.

(3) The persons entitled to attend the meeting are-

(a)eachpartner,and

(b) each person interested in the winding up.

(4) The liquidator must allow the person or persons attending the meeting an opportunity to vote against his release under paragraph 16.

(5) But sub-paragraph (4) does not apply if-

(a)the partnership agreement provides for a quorum for the meeting,

and

(b) the quorum is not present.

(6) It is a default rule that a resolution against the liquidator's release may be decided upon by a majority of the persons attending the meeting.

(7)The liquidator ceases to hold office at the time the meeting finishes (or, if no

one attends the meeting, was due to finish).

(8) If the liquidator fails to comply with this paragraph, he is guilty of an offence and liable on summary conviction to a fine not exceeding level 3 on the standard scale.

Power of court to order an account

If during the course of the winding up of the partnership by the liquidator (a) a partner, or

(b) a person interested in the winding up,

is not satisfied with the way in which the winding up is being conducted, he may apply to the court to order an account to be taken of the partnership business and affairs.

Reference of questions to court

13 (1) An application may be made to the court to determine any question arising in the winding up of the partnership.

(2)The application may be made by-

(a) the liquidator, (b) a partner,

(e) if not a creditor of the partnership, a person who ceased to be a

partner before the break up of the partnership.

(3) If the court is satisfied that the determination of the question will be just and beneficial, it may-

(a) accede wholly or partially to the application on such terms and

conditions as it thinks fit, or

(b) make such other order as it thinks fit.

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EXPLANATORY NOTES

Paragraph 12 gives a right to partners or others interested in the winding up, where they are dissatisfied with the conduct of the winding up, to apply to the court to order an account to be taken of the partnership's affairs. See the report, paragraphs 12.85 and 12.86(5).

During the winding up questions may arise which need to be determined by the court.

Paragraph 13 gives interested parties a right to apply to the court to determine such questions. The court has power to make appropriate orders. A liquidator might apply to court under this provision, for example, if he was unsure of the effect of the rules in the partnership agreement governing the distribution of surplus assets to the partners. Similarly, a partner who believed that the liquidator was misunderstanding such a rule might apply to the court to have the issue resolved. On the other hand, as noted in relation to paragraph 1 of the notes to this Schedule, it is unlikely that a partner would persuade a court to interfere with an exercise of the liquidator's discretion. See the report, paragraphs 12.87 and 12.88.

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Resignation of liquidator

14 (1) The liquidator may at any time resign as liquidator by giving notice of his intention to do so.

(2) The notice must include a full and true account of the conduct of the winding

upshowing,inparticular-

(a) a summary of his receipts and payments, and

(b) how any partnership property or trust property has been disposed of.

(3) The notice must be given to-

(a)thecourt,

(b) each partner,

(d) if the liquidator was appointed on the application of a creditor of the partnership, the creditor.

(4)The resignation notice takes effect -

(a) at the end of the period of 8 weeks starting with the day on which it is given, or

(b) if earlier, at the time from which the liquidator's release has effect under paragraph 16(2).

Appointment or removal of liquidatorbycourt

15 (1) If for any reason there is no liquidator acting, the court may appoint a liquidator.

(2) The court may, on cause shown, remove a liquidator and appoint another.

Release of liquidator

16(1)If the liquidator complies with paragraph 11 and either -

(a) no one attends the meeting summoned under paragraph 11(2),

(b) the person or persons attending the meeting do not resolve against his release under paragraph 11(4), or

he is released with effect from the time at which he ceases to hold office.

(2) The court may, on application, order that (a) the liquidator, or

(b) a person who has ceased to be the liquidator,

should be released with effect from a time specified in the order.

(3)The application may be made by -

(a) the person to whom the application relates, or (b) if he has died, his personal representative.

(4) A liquidator who is released is, with effect from the time specified in sub paragraph (1) or (2), discharged from all liability to partners, former partners

and the partnership -

(a) in respect of acts or omissions of his in the winding up, and (b) otherwise in relation to his conduct as liquidator.

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EXPLANATORY NOTES

Paragraph 14 provides that the liquidator may resign at any time by giving notice. He must include an account of the conduct of the winding up in his notice. See the report, paragraphs 12.97 and 12.99(1).

Paragraph 15(1) provides for the situation where a partnership liquidator ceases to act (for example, by resigning under paragraph 14) and it is necessary to appoint a replacement. The court is given the power to appoint a replacement partnership liquidator. Paragraph 15(2) provides that, where a partnership liquidator is guilty of misconduct or there is other sufficient reason to justify his replacement, the court may remove him and appoint a replacement. See the report paragraphs 12.95 and 12.96.

Paragraph 16 deals with the release and discharge of a partnership liquidator on completion of the winding up. In the first instance, the partnership liquidator should be able to obtain release and discharge from the partnership by summoning a meeting of the partners to consider his application (see paragraph 11). As the fallback, the partnership liquidator should be entitled to apply to the court to obtain release and discharge.

T he effect of the discharge is to release the partnership liquidator from liability to the partnership, partners, former partners and the estates of former partners (sub-paragraph (4)). That release will not apply if the liquidator has obtained his release by fraud or deliberate concealment of wrongdoing (as the liquidator would not in those circumstances have complied with paragraph 11 and in particular the requirement to prepare a "full and true account of the conduct of the winding up"). The discharge has no effect in relation to third party claims against the partnership liquidator. See the report, paragraphs 12.97 12.98 and 12.99(2) and (3).

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Partnerships Bill

Schedule 4 - Winding up by liquidator Part 1 - General

(5) In sub-paragraph (4) "liquidator" includes a person who has ceased to be the liquidator.

Expenses of winding up

Rules

All expenses properly incurred in the winding up, including the remuneration of the liquidator or any provisional liquidator appointed under section 51, are payable out of the partnership's assets in priority to all other claims.

18 (1) The Secretary of State may make rules for the purpose of giving effect to this

Schedule.

(2) The rules may, in particular, make provision as to the remuneration payable to the liquidator.

PART 2

POWERS OF LIQUIDATOR EXERCISABLE WITH APPROVAL OR SANCTION

Power to make any compromise or arrangement with creditors or persons claiming to be creditors, or having or alleging themselves to have any claim (present or future, certain or contingent, ascertained or sounding only in damages) against the partnership, or whereby the partnership may be rendered liable.

Power to compromise, on such terms as may be agreed-

(a) all debts and liabilities capable of resulting in debts, and all claims (present or future, certain or contingent, ascertained or sounding only in damages) subsisting or supposed to subsist between the partnership and a partner, former partner or other debtor or person apprehending liability to the partnership, and

(b) all questions in any way relating to or affecting the assets or the

winding up of the partnership,

and take any security for the discharge of any such debt, liability or claim and give a complete discharge in respect of it.

Power to carry on the partnership business so far as may be necessary for the beneficial winding up of the partnership.

PART 3

POWERS OF LIQUIDATOR EXERCISABLE WITHOUT APPROVAL OR SANCTION

Power to bring or defend any action or other legal proceeding in the name and on behalf of the partnership.

Power to sell any partnership property by public auction or private contract with power-

(a) to transfer the whole of it, or (b) to sell it in parcels.

This is subject to paragraph 4 (distribution of property to partners etc. in existing form).

430

EXPLANATORY NOTES

Paragraph 17 gives the partnership liquidator priority in respect of all expenses properly incurred in the winding up, including his remuneration. See the report, paragraphs 12.100 - 12.101.

As there may be matters relating to the solvent winding up of partnerships which would be more appropriately dealt with in subordinate legislation than in the draft Bill, paragraph 18 provides for a rule-making power. See the report, paragraphs 12.105 - 12.106.

Part 2

Paragraphs 19 - 21 set out the powers of the partnership liquidator which require approval or sanction. See paragraph 3(1) of Schedule 4 and the report, paragraphs 12.75 - 12.76 and 12.78(1).

Part 3

Paragraphs 22 - 28 set out the powers which the partnership liquidator may exercise without approval or sanction. See paragraph 3(2) of Schedule 4 and the report, paragraphs 12.71 - 12.73 and 12.74(2).

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46	Partnerships Bill

Schedule 4 - Winding up by liquidator Part 3 - Powers o/liquidator exercisable without appraval or sanction

24	Power to do all acts and execute, in the name and on behalf of the

partnership, all deeds, receipts and other documents.

Power to prove, rank and claim in the bankruptcy, insolvency or sequestration of any partner, former partner or other debtor of the partnership for any balance against his estate, and to receive dividends in the bankruptcy, insolvency or sequestration in respect of that balance, as a separate debt due from the bankrupt or insolvent, and rateably with the other separate creditors.

Power to borrow any money required on the security of the partnership's assets.

27	Power to appoint an agent to do any business which it would be

unreasonable for the liquidator to have to do himself.

28	Power to do all such other things as may be necessary for winding up the

partnership and distributing its property.

PART 4

LIQUIDATOR'S POWERS IN RELATION TO SEQUESTRATION OF ESTATES OF PARTNERS AND PARTNERSHIP (SCOTLAND)

29	TheBankruptcy(Scotland)Act1985(c.66)is amended as follows.

30 (1) Section 5 (sequestration of the estate of living or deceased debtor) is

amended as follows.

(2) In subsection (2) -

(a) the word "or" before paragraph (c) is repealed, and (b) after that paragraph, there is inserted "i or

(d) where the debtor is a partner, a liquidator appointed

under section 50 of the Partnerships Act 2003 in

respect of the partnership, but only if the conditions in subsection (2D) below are satisfied."

(3) After subsection (2C), there is inserted-

"(2D) The conditions mentioned in paragraph (d) of subsection (2) above

arethat-

(a) the partnership is a qualified creditor, and

(b) the liquidator referred to in that paragraph is presenting or has presented a petition for sequestration of the estate of the partnership."

31(1 Section 6 (sequestration of other estates)is amended as follows.

(2) In subsection (4) -

(a) the word "or" before paragraph (b) is repealed, and (b) after that paragraph, there is inserted "i or

Partnerships Act 2003 in respect of the partnership, if

paragraph 9 of Schedule 4 to that Act applies."

(3) In subsection (5), after "(4)(b)" there is inserted "or (c)".

432

Partnerships Bill

Schedule 5 - Functions of provisional liquidator

SCHEDULE 5

Section 51

FUNCTIONS OF PROVISIONAL LIQUIDATOR

Effect of provisional liquidator 's appointment

1	(1) On the appointment of a provisional liquidator, all the powers of the

partners are suspended, except so far as the provisional liquidator sanctions

their continuance, until the determination of the application under section 50.

(2) Each partner and each person interested in the winding up must cooperate with the provisional liquidator in relation to the performance of his

functions.

(3) In relation to the performance of those functions, the duty imposed by section 9 (overriding duty of good faith) applies not only to a partner but also to a person interested in the winding up.

General duty of provisional liquidator

(1)The provisional liquidator must secure the preservation of-

(a) partnership property, and (b) trust property,

until the application under section 50 has been determined.

(2) But the provisional liquidator must not begin to wind up the partnership.

General powers of provisional liquidator

3	(1)The provisional liquidator may -

(a) with the approval of each of the partners, or (b) with the sanction of the court,

exercise any of the powers specified in Part 2 or 3 of Schedule 4.

(2) Forth is purpose, the power specified in paragraph 21 of that Schedule is

limited to power to carry on the partnership business so far as may be necessary for the preservation of partnership property or trust property.

Contracts entered into by provisional liquidator

4	(1) A contract entered in to by the provisional liquidator in the performance of

his functions is to be taken to be entered into by him on behalf of the

partnership, unless the contract provides that he should be personally liable on it.

(2) If the provisional liquidator assumes personal liability under the contract, he is entitled to an indemnity out of partnership property in respect of that

liability.

(3) This paragraph does not-

(a) limit any right to indemnity which the provisional liquidator would have apart from it,

(b) limit his liability on contracts entered into in breach of this Schedule

or an order of the court, or

434

EXPLANATORY NOTES

Schedule 5

A provisional liquidator may be appointed under clause 51 of the draft Bill. Schedule 5 contains provisions concerning the functions of the provisional liquidator. As to the purpose of appointing a provisional liquidator see the note below on paragraph 2 of this Schedule.

Paragraph 1 sets out the principal effects of the provisional liquidator's appointment. See the report, paragraphs 12.61, 12.63 - 12.65 and 12.66(2), (5) and (6).

Paragraph 2 sets out the general duty of the provisional liquidator. The purpose of the appointment of a provisional liquidator is to preserve partnership property and property which the partnership holds on trust for others pending the determination of an application to appoint a partnership liquidator. See the report, paragraphs 12.54 and 12.56(2).

Paragraph 3 provides that the provisional liquidator may, with the approval of the partners or with the sanction of the court, exercise any of the powers of a partnership liquidator specified in Part 2 or Part 3 of Schedule 4. This is in contrast with a partnership liquidator who requires approval or sanction in relation to Part 2 powers only. A provisional liquidator is subject to a further limitation (to which a partnership liquidator is not) in that the power to carryon the partnership business (Schedule 4, paragraph 21) is limited to the power to carryon the business so far as may be necessary for the preservation of partnership property or trust property. See the report, paragraphs 12.54 and 12.56(3).

As in the case of the partnership liquidator, paragraph 4 provides that, in relation to the provisional liquidator, the general rule is that he should not be personally liable on a contract which he enters into in the performance of his functions. If he does assume personal liability under a contract, he is entitled to an indemnity. See the report, paragraphs 12.69 and 12.70.

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48	Partnerships Bill

Schedule 5 - Functions of provisional liquidator

Resignation of provisional liquidator

5	(1) The provisional liquidator may at anytime resign as provisional liquidator

by giving notice of his intention to do so.

(2) The notice must include a full and true statement of his acts and dealings as provisional liquidator .

(3) The notice must be given to (a) the court,

(b)eachpartner,

(d) if the provisional liquidator was appointed on the application of a creditor of the partnership, the creditor.

(4) The resignation notice takes effect-

(a )at the end of the period of 8 weeks starting with the day onw hich it

is given, or

(b) if earlier, at the time from which the provisional liquidator's release has effect under paragraph 8(1).

Appointment or removal of provisional liquidator by court

(1) If for any reason there is no provisional liquidator acting, the court may

appoint a provisional liquidator.

(2) The court may, on cause shown, remove a provisional liquidator and appoint another.

Ceasing to hold office on determination of section 50 application

The provisional liquidator ceases to hold office on the determination of the application under section 50.

Release of provisional liquidator

8	(1)Thecourtmay,onapplication,orderthat-

(a) the provisional liquidator, or

(b) a person who has ceased to be the provisional liquidator,

should be released with effect from a time specified in the order.

(2) The application may be made by-

(a) the person to whom the application relates, or (b) if he has died, his personal representative.

(3) A provisional liquidator (or a person who has ceased to be the provisional

liquidator) who is released is, with effect from the time specified in sub paragraph (I), discharged from all liability to partners, former partners and the partnership -

(a) in respect of acts or omissions of his in the performance of his

functions,and

(b) otherwise in relation to his conduct as provisional liquidator.

436

EXPLANATORY NOTES

Paragraph 5 provides that a provisional liquidator should be able to resign in the same way as a partnership liquidator. See the report, paragraphs 12.102 - 12.104(1).

Paragraph 6 provides that the court can appoint a provisional liquidator if there happens to be no provisional liquidator acting and also that the court may, on cause shown, remove a provisional liquidator and appoint another. Again this mirrors the provision in relation to a partnership liquidator. See the report, paragraphs 12.103 and 12.104(3).

As the provisional liquidator holds office on an interim basis only, paragraph 7 provides that he ceases to hold office on the determination of the application under clause 50 for the appointment of a partnership liquidator. See the report, paragraphs 12.103 and 12.104(2).

Paragraph 8 provides that the provisional liquidator should be en titled to release if the court grants such an application. On his release the provisional liquidator is discharged from liability to the partnership, partners, former partners and the estates of former partners. As is the case in relation to liquidators, the release will not apply if he has obtained his release by fraud or deliberate concealment of wrongdoing; and the discharge has no effect in relation to third party claims against him. See the report, paragraphs 12.103 and 12.104(4) and (5).

437

EXPLANATORY NOTES

Paragraph 5 provides that a provisional liquidator should be able to resign in the same way as a partnership liquidator. See the report, paragraphs 12.102 - 12.104(1).

Paragraph 6 provides that the court can appoint a provisional liquidator if there happens to be no provisional liquidator acting and also that the court may, on cause shown, remove a provisional liquidator and appoint another. Again this mirrors the provision in relation to a partnership liquidator. See the report, paragraphs 12.103 and 12.104(3).

As the provisional liquidator holds office on an interim basis only, paragraph 7 provides that he ceases to hold office on the determination of the application under clause 50 for the appointment of a partnership liquidator. See the report, paragraphs 12.103 and 12.104(2).

Paragraph 8 provides that the provisional liquidator should be en titled to release if the court grants such an application. On his release the provisional liquidator is discharged from liability to the partnership, partners, former partners and the estates of former partners. As is the case in relation to liquidators, the release will not apply if he has obtained his release by fraud or deliberate concealment of wrongdoing; and the discharge has no effect in relation to third party claims against him. See the report, paragraphs 12.103 and 12.104(4) and (5).

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Partnerships Bill

Schedule 5 - Functions of provisional liquidator

Rules

9	(1) The Secretary of State may make rules for the purpose of giving effect to this

Schedule.

(2) The rules may, in particular, make provision as to the remuneration payable

to the provisional liquidator.

SCHEDULE 6

Section 55

PERMITTED ACTIVITIES FOR LIMITED PARTNERS

Each of the following is a permitted activity-

Strategic decisions

Taking part in a decision about the variation of the partnership agreement.

2	Taking part in a decision about whether to approve, or veto, a

class of investment by the limited partnership.

Note that this is subject to section 59(4) and (5) (default rules about decision-making).

3	Taking part in a decision about whether the general nature of the

partnership business should change.

4	Taking part in a decision about whether to dispose of the

partnership business or to acquire another business.

Note that this is subject to section 59(4) and (5) (default rules

about decision-making).

5	Taking part in a decision about whether a person should become

or cease to be a partner.

Note that this is subject to section 60(1) (default rule about admission of new partners).

6	Taking part in a decision about whether the partnership should

end.

Note that this is subject to section 61(1) (default rule about break up of limited partnership).

Taking part in a decision about how the partnership should be wound up.

Note that this is subject to section 61(2), (4) and (5) (default rules about winding up of limited partnership).

Enforcement of rights

8	Enforcing his rights under the partnership agreement (unless

those rights are to carry out management functions).

438

EXPLANATORY NOTES

As is the case in relation to the partnership liquidator, there are matters relating to the provisional liquidator which would be more appropriately dealt with in subordinate legislation than in the draft Bill. Paragraph 9 provides a rule-making power. See the report, paragraphs 12.105 and 12.106.

Schedule 6

Schedule 6 sets out a list of activities that a limited partner may undertake without risking taking part in management (which would mean losing limited liability). See the report, paragraphs 17.3 -17.17. All the activities on the list either relate to the governance or strategic direction of the partnership, or involve the limited partner in the partnership in a capacity which is different from them acting as partner, for example paragraphs 10 and 11. The list is not exhaustive. There will be other non-listed activities that are clearly not taking part in management that the limited partner will be able to undertake safely.

228.	A decision to vary the partnership agreement will normally involve the agreement of all of

the partners. Taking part in such a decision is a permitted activity under paragraph 1. Paragraph 2 would allow a limited partner to take part in a decision about broad classes of investment, such as a decision not to invest in certain types of industry on ethical grounds. It would not permit taking part in day-to-day decisions to invest in particular companies.

A decision about whether the partnership business should change goes to the fundamental contract between the partners and as such is a strategic decision about the nature of the joint venture. As a default rule limited partners may take part in a decision about whether the nature of the partnership business should be changed (clause 59(7)). Given this, it is included in Schedule 6 as paragraph 3.

Paragraph 4 is directed at, among other things, decisions about whether the partnership should merge or consolidate with another partnership. Paragraph 5 may also be relevant in this situation, depending upon how the merger is achieved. For example, if two limited partnerships decide to merge, this may be achieved by the partners in one of the firms becoming partners in the second firm. Decisions prior to the merger within the individual partnerships about whether this should occur would be included within paragraph 5.

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Partnerships Bill Schedule 7 - Registration of changes and corrections

Approving accounts of limited partnership

9	Approving the accounts of the limited partnership.

Contract work

10	Being engaged under a contract by the limited partnership or by a

general partner in the limited partnership (unless the contract is to carry out management functions).

Directorships etc.

11	Acting in his capacity as a director or employee of, or a

shareholder in, a corporate general partner.

Conflicts of interest between limited and general partners

12	Taking part in a decision which involves an actual or potential

conflict of interest between a limited partner (or limited partners) and a general partner (or general partners).

Consultation and advice

13	Discussing the prospects of the partnership business.

14	Consulting or advising a general partner, or the general partners,

about the activities of the limited partnership or about its accounts (including doing so as a member of an advisory committee of the limited partnership).

SCHEDULE 7

Section 68(1)

REGISTRATION OF CHANGES AND CORRECTIONS

Change of partnership name

(1) For the name of a limited partnership to be changed, notice of the proposed change must have been delivered to the registrar.

(2) The notice must-

(a) specify the existing name of the limited partnership,

(b) specify the proposed name of the limited partnership, and

(3) The notice must be signed by-

(a) the general partner or, if there is more than one general partner, all of them, or

(b) a person (other than a general partner) who has authority to give the notice on behalf of the partnership.

(4) On receiving the notice the registrar must, if satisfied that section 63 is complied with-

(a) alter the register to record the change of name, and

440

EXPLANATORY NOTES

Paragraph 11 will allow a limited partner to do things that would otherwise constitute management, as long as they are genuinely done in a different capacity, for example as director of a general partner that is a company. See the report, paragraph 17.16.

Under section 6(1) of the 1907 Act the limited partner may inspect the books of the firm, examine the prospects of the partnership business and advise "with the partners thereon". Paragraphs 9, 13 and 14 cover these aspects of the limited partner's role (and see also clause 59(1)(b) and the note above on this clause).

Schedule 7

Schedule 7 provides for the detailed workings of the registration system. The general partners are responsible for registration requirements, and keeping the register up to date. This means that limited partners are generally not required to sign notices under Schedule 7 (the only exception being paragraph 4(5)). It is doubtful that limited partners would want to be involved in these matters. In addition, requiring limited partners to sign these notices would not be consistent with the prohibition on limited partners taking part in management.

The concern that might arise where the limited partners do not sign the notices is what the consequences are if the general partner makes a mistake in the registration of a limited partner. If a general partner makes a mistake in the registration of a limited partner and the would-be limited partner is exposed to liability as a result, this can be rectified by the court by an application under clause 47. For example, the general partner may wrongly register a new limited partner as a general partner, rather than as a limited partner. As we expect the register under the new Act to be on-line it will be a simple matter for a limited partner to check his status on the register to see if and when he has been registered as a limited partner. When a limited partner becomes aware of the mistake in registration he can apply for an order under clause 47. T he court has wide powers to give directions under Schedule 3, paragraph 3. The court may make an order removing him from the partnership, backdated to the date he was registered. There is also a power to put the applicant and other third parties in the position they would have been in had the partner ceased to be a partner on the date of the court order. Of course, if the period of mistaken registration is not significant, the would-be limited partner may be content to have himself re-registered as a limited partner without any application to the court.

Most notices in Schedule 7 may be signed by a person with authority to sign on behalf of the partnership. This will encompass 'authorised persons' under the Financial Services and Markets Act 2000 (see discussion of the FSMA in the notes above on clause 66).

Paragraph 1 allows for the procedure by which a limited partnership can change its registered name. See the report, paragraphs 15.40-15.41. The name of the partnership is one of the main ways that third parties will use to search the register. It is important, therefore, that the name is not altered in law until the change in name is registered. Paragraph 2 provides similarly for a change in the partnership's registered office. See the report, paragraphs 15.52 - 15.53.

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Partnerships Bill

Schedule 7 - Registration of changes and corrections

(b) supply the partnership with a certificate signed by him of the change of name.

(5) The certificate must record-

(a) the change of name, and

(b) the date on which the change was registered.

(6) The change of name has effect from the date on which it was registered. (7) The change of name does not-

(a) affect any rights or duties of the limited partnership, or (b) render defective any legal proceedings by or against it,

and any legal proceedings that might have been ontinued or commenced

by or against it in its former name may be continued or commenced by or against it in its new name.

Change of registered office

2	(1) For the registered office of al imited partnership to be changed -

(a) with in England and Wales, or

(b) within Scotland,

notice of the proposed change must have been delivered to the registrar.

(2) The notice must specify-

(a) the existing registered office of the limited partnership, and

(b) the proposed registered office of the limited partnership.

(3) The notice must be signed by (a) a general partner, or

(b) a person (other than a general partner) who has authority to give the notice on behalf of the partnership.

(4) On receiving the notice the registrar must alter the register to record the

change of registered office.

(5) The change has effect from the date on which it was registered.

Registration of new limited partners

3	(1) For a person to become a limited partner in an existing limited partnership,

notice that he is a proposed limited partner must have been delivered to the

registrar .

(2) The notice must specify-

(a) the name of the limited partnership,

(b) the name of the proposed limited partner, and

(c)the amount of any relevant capital contribution being made by him

to the partnership.

(3) If the proposed limited partner is a general partner in the limited partnership, the notice must state that fact.

(4) The notice must be signed by-

(a) a general partner, or

(b) a person (other than a general partner) who has authority to give the notice on behalf of the partnership.

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Partnerships Bill Schedule 7 - Registration of changes and corrections

(5) But if sub-paragraph (3) applies, the notice may not be signed by the proposed limited partner.

(6) On receiving a notice under this paragraph, the registrar must-

(a) register the proposed limited partner as a limited partner in the

partnership,and

(b) if sub-paragraph (3) applies, ensure that the register is altered to record the fact that the partner has ceased to be a general partner in the partnership.

(7) The proposed limited partner becomes a limited partner on the date

recorded in the register as the date of his registration.

Registration of persons ceasing to be limited partners

4	(1) For a person to cease to be a limited partner in a limited partnership,

otherwise than-

(a) on his death or (if not an individual) dissolution, or

(b)on the dissolution of the partnership,

notice that he is to cease to be a limited partner must have been delivered to the registrar.

(2) The notice must specify-

(a) the name of the limited partnership, and

(b)the name of the person who is to cease to be a limited partner.

(3) If the person to whom the notice relates is to become a general partner in the limited partnership, the notice must state that fact.

(4) The notice must be signed by-

(a) a general partner, or

(b) a person (other than a general partner) who has authority to give the

notice on behalf of the partnership.

(5) But if-

(a) sub-paragraph (3) applies, and

(b) the partnership does not have one or more general partners,

the notice must be signed by the person to whom the notice relates.

(6) On receiving a notice under this paragraph, the registrar must-

(a) register the person as no longer being a limited partner in the partnership, and

(b) if sub-paragraph (3) applies, ensure that the register is altered to

reflect the fact that the person has become a general partner in the

partnership.

(7) The person ceases to be a limited partner on the date recorded in the register as the date on which he is no longer a limited partner in the partnership.

Registration of other changes relating to limited partnerships

(1)If during the continuance of a limited partnership any of the events

described in the Table occurs, a notice specifying the nature of the event must be delivered to the registrar within 28 days.

444

EXPLANATORY NOTES

Paragraph 4(7) provides the parallel certainty about when a person ceases to be a limited partner. In all cases where this is voluntary the person ceases to be a partner only once the change is registered. Where the person ceases to be a limited partner involuntarily, (upon death, or dissolution where the partner is a body corporate), the change is effective immediately and the change must be registered within 28 days of the death or dissolution (paragraph 5(1) item 3). See the report, paragraphs 15.46 - 15.47 and 15.49(2).

As with other changes to registered particulars it is the general partner (or authorised person; see the notes above on clause 66) who is responsible for signing the notice that an individual has ceased to be a limited partner. However, paragraph 4 also provides for a situation where a limited partnership may not have any general partners and a limited partner wants to become a general partner. See the report, paragraphs 16.11 and 16.14(4).

In paragraph 5 a uniform 28 days has been provided for notification of all changes (See the report, paragraph 15.50). We think that a uniform period makes compliance easier, especially for smaller partnerships. There is no detriment to the third party from a 28 day notice period as in most cases the changes to be notified are incidental, such as address changes or the change in the capital contribution. Where a person becomes a general partner their personal liability as a partner is not dependent upon registration. They will be fully liable from the moment they become a general partner, whether registered or not.

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Partnerships Bill

Schedule 7 - Registration of changes and corrections

nature of change

1	A person becomes a general partner.

2	A person ceases to be a general partner.

A person ceases to be a limited partner on his death or (if not an individual) dissolution.

4	The name of an existing general or limited partner changes.

5	The address of an existing general partner changes.

6	There is a change in the amount of the relevant capital

contribution of a limited partner.

(2) The notice must be signed by -

(a) a general partner, or

(b) a person (other than a general partner) who has authority to give the notice on behalf of the partnership.

(3) Where it is proposed that a person who is a limited partner should become

ageneral partner, item 1 of the Table does not apply (and paragraph 4 does).

(4) Where it is proposed that a person who is a general partner should become a limited partner, item 2 of the Table does not apply (and paragraph 3 does).

(5) A person who has ceased to be a general partner in a limited partnership may, at any time during the continuance of the limited partnership, deliver

to the registrar a notice -

(a) signed by him, and

(b) specifying that he has ceased to be a general partner in the partnership.

(6) On receiving a notice under this paragraph, the registrar must ensure that

the register is altered so far as necessary to record the specified change.

(7) Any general partner who without reasonable excuse fails to ensure that sub paragraph (1) is complied with is guilty of an offence and liable on summary conviction to a fine not exceeding-

(a) £1000 for the first day on which the failure occurs, and

(b) £100 for each day during which the failure continues.

Registration of corrections

6	(1)The registrar may at any time register a correction to the register, on the

application of-

(a) a general partner, or

(b) a person (other than a general partner) who has authority to make

the application on behalf of the partnership.

(2) "Correction" means an alteration in the register which needs to be made because of an error having occurred in incorporating into the register the information supplied to the registrar.

(3)If the correction relates to information contained in -

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Partnerships Bill Schedule 7 - Registration of changes and corrections

(a) the certificate of the registration of the partnership, or (b) a certificate of a change in the name of the partnership,

the registrar must supply the partnership with a revised certificate.

SCHEDULE 8

Section 68(2)

DEREGISTRATION

Power to deregister on application by partners

1	(1) The registrar may deregister a limited partnership if -

(a) an application has been delivered to the registrar for its deregistration, and

(b) the requirements relating to a deregistration warning are complied

with (as to which, see paragraph 4).

(2) No application may be made under this paragraph unless-

(a) all the persons who are partners at the time of the application agree, or

(b) if at the time of the application the partnership has been dissolved,

all the persons who were partners immediately before dissolution agree.

(3) The application must-

(a) confirm that each of the persons whose agreement is required under

sub-paragraph (2)(a) or (b) has agreed to make the application,

(b) state who those persons are, and

(4) The application must be signed by-

(a) the general partner or, if there is more than one general partner, all

of them, or

(b) a person (other than a general partner) who has authority to make the application on behalf of the partnership.

(5) But if there are no general partners, the application must be signed by all of

the persons whose agreement is required under sub-paragraph (2)(a) or (b).

(6) Paragraphs 4 and 5 apply in relation to deregistration of a limited partnership which has been dissolved as if the references to a limited partnership were references to a dissolved limited partnership.

Power to deregister on inquiry by registrar

(1)The registrar may deregister a limited partnership if -

(a) there are reasonable grounds for believing that one of the grounds for doing so exists,

(b) the registrar has made the necessary preliminary inquiries (as to which, see paragraph 3), and

(c)the requirements relating to a deregistrationw arning are complied

with (as to which, see paragraph 4).

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Partnerships Bill				55
Schedule 8 - Deregistration
	(2)	The grounds for deregistering a limited partnership are that-
		(a)	the limited partnership has been dissolved;
		(b)	the limited partnership does not have-
			(i)	one or more general partners, and
			(ii)	one or more limited partners;	5
		(c)	the limited partnership does not have a registered office as required
			by section 62;
		(d)	if the limited partnership was formed under section 67(3), the
			partners have not started to carry on a business together with the
			object of making a profit.		10
	(3)	But the registrar may not deregister a limited partnership on the ground that
		it does not have one or more general partners at a time when-
		(a)	an application has been made under section 50 for the appointment
			of a liquidator for the partnership and the application has not been
			determined, or		15
		(b)	a liquidator has been appointed under section 50 and he has not
			ceased to hold office without being replaced.
	(4)	The registrar may not deregister a limited partnership on the ground in sub-
		paragraph (2)( d) before the end of two years starting with the day on which
		the partnership was formed.			20
	(5)	Paragraphs 3 to 5 apply in relation to deregistration on the ground in sub-
		paragraph (2)(a) as if the references to a limited partnership were references
		to a dissolved limited partnership.
Preliminary inquiries
3	(1)	The registrar makes the necessary preliminary inquiries if-			25
		(a)	he has sent two letters of inquiry to the registered office of the limited
			partnership in accordance with sub-paragraphs (2) to (5), and
		(b)	within the time limit for replying to the second letter, no one has
			shown why he should not deregister the partnership.
	(2)	Each of the letters must-			30
		(a)	state that the registrar believes that one or more of the grounds for
			deregistering the partnership exists,
		(b)	specify the ground or grounds, and
		(c)	invite any person named on the register as a partner, within the time
			limit for replying to the letter, to show why the partnership should		35
			not be deregistered.
	(3)	The second letter must be sent-
		(a)	at the end of two weeks from the time limit for replying to the first
			letter (or as soon as possible thereafter), and
		(b)	by registered post or recorded delivery.		40
	(4)	The time limit for replying to each letter is one month from the date of the
		letter.
	(5)	If there are reasonable grounds for believing that the partnership does not
		have a registered office, the letters of inquiry must instead be sent-
		(a)	in the case of each person named on the register as a general partner,		45
			to his address as specified in the register, and

450

56	Partnerships Bill

Schedule 8 - Deregistration

(b) in the case of each person named on the register as a limited partner, to his address if known to the registrar.

Deregistration warning

4	(1) The requirements relating to a deregistration warning are that -

(a) at least 3 months before the registrar deregisters the partnership, a

deregistration warning has been published in the Gazette, and

(b) in that 3 month period, no one has shown why he should not deregister it.

(2) The deregistration warning must-

(a) specify the name under which the limited partnership is registered,

(b) state that the registrar may exercise his power under this Act to deregister it, and

Deregistration

(1) If the registrar deregisters a limited partnership, he must publish notice of

the fact in the Gazette, specifying the date on which the deregistration occurred.

(2) The deregistration has effect on the date specified in the notice. (3) On deregistration-

(a)the limited partnership becomes a general partnership, and

(b) each general or limited partner in the limited partnership becomes a partner in the general partnership.

(4) But sub-paragraph (3) does not apply if the limited partnership had been dissolved before the deregistration.

(5)The deregistration does not affect the personal liability of any partner for

partnership obligations incurred while the partnership was registered as a limited partnership.

Order where limited partnership should not have been deregistered

6	(1)This paragraph applies if -

(a)a limited partnership has been deregistered (whether under

paragraph 1 or paragraph 2),

(b) after the deregistration, the partnership continued to exist as a general partnership, and

partnership under section 67.

(2) On an application by the partnership or any partner, the court may make an order under this paragraph if it considers that-

(a) the condition in sub-paragraph (3) or (4) is satisfied, and (b) it is just and equitable to do so.

(3)In the case of deregistration under paragraphI,the condition is that the

application for deregistration was made in contravention of paragraph 1(2).

(4) In the case of deregistration under paragraph 2, the condition is that either-

452

EXPLANATORY NOTES

Paragraph 4 sets out the de-registration warning process. This is a safeguard which requires the registrar to publish the intended de-registration in the Gazette and provide 3 months for anyone to show why the partnership should not be de-registered. The registrar must go through this process each time a limited partnership is being de-registered, whether it is partner initiated or initiated by the registrar.
The reason that the de-registration warning is necessary where the partners themselves have applied to be de-registered is that a general partner or authorised person may apply for de registration in the mistaken belief that all of the partners have agreed (paragraph 1(2)). De registration has the potential to expose the limited partners to unlimited liability. The publication of this warning in the Gazette gives any limited partners in the partnership the opportunity to object to the de-registration application if this is appropriate.
Paragraph 2 provides the power for the registrar to de-register a limited partnership if he has reasonable grounds for believing that the limited partnership either has been dissolved or does not satisfy one of the requirements of being a limited partnership, for example the limited partnership does not have at least 1 general partner. The registrar must also publish the de registration warning (paragraph 4). In addition, and prior to this, the registrar must make the preliminary inquiries set out in paragraph 3 to find out whether it is appropriate to de-register the partnership.
There are also two sets of circumstances where a limited partnership satisfies one of the grounds for de-registration but, despite this, it is inappropriate that the partnership be de-registered. These are provided for in paragraph 2(3) and (4). Sub-paragraph (3) relates to a situation where a limited partnership has no general partners and is being wound up by a liquidator, or an application has been made for a liquidator to be appointed. Without sub-paragraph (3) the partnership would be susceptible to being de-registered because the partnership does not have 1 or more general partners (paragraph 2(2)(b )(i)). However, if the partnership was de-registered while being wound up by the liquidator the limited partners would be exposed to personal liability during the winding up. The effect would be the same if the partnership was de registered while awaiting the appointment of a liquidator. As the winding up is a finite process there is no detriment to allowing the limited partnership to stay on the register during the course of the liquidator's appointment. This protects the limited partners until the partnership has been dissolved. It will then be able to be de-registered, either under paragraph 1 by application of the former partners, or under paragraph 2 by the registrar on the ground that the limited partnership has been dissolved.
Where a general partnership registers to become a limited partnership it is usual that a partnership business is in operation prior to registration. This usually means that all elements of a partnership are present, including the element of carrying on business with a view to making a profit. Where there is no partnership in existence prior to registration as a limited partnership, under clause 67(3) a new partnership is formed on this date. It is expected that the new limited partnership will then begin to trade, thereby fulfilling all the elements of a partnership, by carrying on business with the object of making a profit. If the limited partnership did not begin to carryon business it would not truly be a partnership, despite it being registered as a limited partnership. Thus, it is appropriate that a limited partnership be de-registered if the partners have not started to carryon a business together with the object of making a profit (Schedule 8, paragraph 2(2)(d)). However, sub-paragraph (4) has been included to provide, for newly registered limited partnerships, a period of 2 years when paragraph 2(2)( d) does not apply.
A 2-year period has been provided in sub-paragraph (4) to make provision for limited partnerships that are registered to be sold as 'off the shelf limited partnerships. It has also been included to accommodate the usual practice of establishing limited partnerships for investment purposes. In many cases the limited partnership is registered before investors are sought and it is appropriate to allow a reasonable period before the partners in the limited partnership start to carryon business. If this provision were not included the limited partnership would be at danger of being de-registered during this establishment period under paragraph 2(2)(d) of this Schedule.

453

Partnerships Bill

Schedule 8 - Deregistration

(a) none of the grounds for deregistration in paragraph 2(2) applied in relation to the partnership, or

(b) the partnership was deregistered in contravention of paragraph 2(3) or (4).

(5)The order may make such provision as the court thinks fit for putting the

limited partnership and other persons-

(a) in the position they would have been in if the limited partnership had not been deregistered, or

(b) so near that position as the court considers just and equitable.

(6) An application under this paragraph must be made before the end of 3 years

starting with the day on which the notice of deregistration was published under paragraph 5.

SCHEDULE 9

Section 68(3)

ADMINISTRATION OF THE REGISTRATION SYSTEM

Delivery of documents

1	(1) For the purposes of this Part, "deliver", in relation to a document required to

be delivered to the registrar, includes sending the document in a form and by a means approved by him.

(2) Sub-paragraph (3) applies if, under an order made under section 69 of the

Deregulation and Contracting Out Act 1994 (c.40), a person is authorised to

accept delivery of any class of documents which under this Part are required to be delivered to the registrar.

(3) If-

(a) the registrar directs that documents of that class are to be delivered

to a specified address of the authorised person, and

(b) the direction is printed and made available to the public (with or

without payment),

any document of that class which is delivered to an address other than the specified address is to be treated for the purposes of this Part as if it had not

beendelivered.

Registration of information about limited partnerships

2	(1) The information contained in a document delivered to the registrar under

this Part may be registered and kept by him in any form he thinks fit, provided it is possible to inspect the information and to produce a copy of it

inlegibleform.

(2) Originals of documents sent under this Part to the registrar in legible form must be kept by him for 10 years, after which they may be destroyed.

Inspection of registers etc.

3	(1) Any person may inspect information kept by the registrar for the purposes

of this Part and may require -

454

EXPLANATORY NOTES

Paragraph 6 is designed for the situation where a limited partnership is de-registered mistakenly. See the report, paragraphs 15.82 - 15.83. In this case the limited partnership should register again under clause 67. However, this still leaves a period between the mistaken de-registration and the re-registration of the partnership. During this interim period the partnership will be a general partnership and all partners will be general partners with unlimited liability for that period. Where certain conditions are fulfilled a limited partnership can, under paragraph 6, apply to the court for an order dealing with the interim period. This order can put the limited partnership and other persons (including limited partners and third persons) in the position they would have been in had the partnership not been de-registered, if it is just and equitable to do so (paragraph 6(5)(b)). For example, this would allow a limited partner's liability that arises during the interim period to be limited by court order.

The conditions for obtaining a court order under paragraph 6 depend upon whether the mistaken de-registration was a partner-initiated de-registration or one initiated by the registrar. If it was initiated by the partners it must be the case that the agreement of all the partners to the de-registration was not actually present. If it is a de-registration initiated by the registrar the conditions are (a) that the ground that the registrar relied upon in paragraph 2(2) did not actually exist at the time (for example, that the limited partnership had not been dissolved), or (b) that the registrar did not take into account the fact that one of the exceptions in paragraph 2(3) or (4) applied to the limited partnership. In addition, the court will only make an order if it considers that it is just and equitable to do so (paragraph 6(2)(b)).

Schedule 9

Paragraph 1(1) has been provided to allow for the possibility of electronic filing and/or delivery of documents to the registrar. See the report, paragraphs 15.56 - 15.57.

Paragraph 2(1) will allow the development of an on-line register, similar to the register of companies that is searchable online. Sub-paragraph (2) is the equivalent to section 707A(2) of the Companies Act 1985. See the report, paragraphs 15.58 - 15.59.

Paragraph 3 recreates, in modern form, the effect of section 16 of the Limited Partnerships Act 1907. See the report, paragraphs 15.60 - 15.61.

455

Partnerships Bill Schedule 9 - Administration of the registration system

(a) a copy, in such form as the registrar considers appropriate, of information kept in the register, or

(b) a certified copy of, or extract from, the original of any document.

(2) Any person may require a certificate, signed by the registrar, of-

(a) the registration of a partnership as a limited partnership, or

(b) the registration of a change in the name of a limited partnership.

Regulations

4	(1)The Secretary of State may by regulations make provision in connection with

the registration of limited partnerships under this Act.

(2)The regulations may, in particular -

(a) impose fees (to be paid into the Consolidated Fund) in respect of (i) the registration of a limited partnership or of information relating to a limited partnership,

(ii) the inspection of any register, documents or information

relating to limited partnerships, or

(Hi) the provision of any certificate relating to a limited partnership or of an extract or copy of any document;

(b) make provision for the performance by the assistant registrar and other officers of acts which this Part requires to be done by the

registrar;

(c) make provision in connection with the supply or obtaining of Welsh or English translations of documents delivered to the registrar which relate to limited partnerships whose registered office is (or is to be) in Wales.

SCHEDULE 10

Section 73

SPECIAL LIMITED PARTNERSHIPS

Introduction

The following are the modifications and additional provisions that apply in relation to a special limited partnership.

Except in paragraph 3, references to a partnership are to a special limited partnership.

Meaning of partnership agreement and partnership

3	(1)
	(2)
	(3)
	(4)

This paragraph applies instead of section 1.

A partnership agreement is an agreement between two or more persons for

carrying on a business to gether with the object of making a profit.

For the purposes of this Act, "partnership" is the relation which subsists between persons carrying on a business together under a partnership agreement.

For the purposes of this Act, persons who have entered into partnership

with one another are called collectively "a partnership".

456

EXPLANATORY NOTES

By allowing fees to be set by regulations, paragraph 4 corrects a flaw in the 1907 Act, which set the level of fees in the primary Act. This has meant that the level of fees has become outdated and has not provided funds to modernise the register. See the report, paragraphs 15.62 - 15.63(1).

Schedule 10

The special limited partnership has been provided specifically for use as an investment vehicle. See the report, paragraphs 19.2 - 19.10. It is available only under the law of England and Wales as it preserves the aggregate approach of that law. Users of special limited partnerships are likely to have sophisticated partnership agreements. See the report, paragraph 19.12. For this reason Schedule 10 generally disapplies most of the default rules in the Bill. It also alters the application of the Bill where it is inappropriate for a partnership without legal personality.

A special limited partnership operates similarly to a limited partnership under the 1907 Act. It is formed in accordance with the aggregate approach to partnership rather than as an entity as created by Part 3 of the Bill. See paragraph 3(3), and see the report, paragraph 19.14. There are other modifications necessary to clause 1 to accommodate this form of partnership and these are effected by paragraph 3.

457

Partnerships Bill

Schedule 10 - Special limited partnerships

(5) A partnership is not a special limited partnership unless it is registered as such under paragraph 26.

(6) In this Act "business" includes every trade, profession and occupation.

(7) Schedule 1 provides examples of circumstances which do not by themselves

establish that persons are carrying on a business together.

The carrying on of the partnership business

4	(1) This paragraph applies instead of section 6.

(2) The partners carry on the partnership business.

(3) The partners are agents of each other for the purpose of the partnership

business.

(4) It is a default rule that a change in the nature of the partnership business (whether or not it involves a change in the partnership agreement) requires the agreement of all the partners.

Capacity

Sections 7 (capacity of partnership) and 8 (incapacity to commit offences (England and Wales)) do not apply.

Remuneration, expenses and personal liabilities

6	(1) Section 12 applies but with the following modifications.

(2) In subsection (4), omit "the partnership or". (3) Omit subsections (5) and (6).

(4) In subsection (7), for "other amount" substitute "amount". (5) Omit subsection (8).

Partnership property

7 (1) This paragraph applies instead of sections 17 (partnership property), 18

(rules for identifying partnership property) and 19 (land acquired out of

partnership profits).

(2) In this Act, "partnership property" means all property (a) acquired on behalf of the partnership, or

(b) contributed to the partnership as capital.

(3) Partnership property must be held and applied by the partners exclusively

for the purposes of the partnership and in accordance with the partnership agreement.

Execution of documents

8	Section 20 (execution of deeds(England and Wales))does not apply.

Secondary liability of partners

9	(1) Section23 (unlimited liability of partners) applies but with the following

modifications.

458

60
	(2)
	(3)
10

Partnerships Bill Schedule 10 - Special limited partnerships

In subsection (I), after "personally liable" insert 'lointly and severally with the other partners".

Omit subsections (3) to (5).

The following provisions do not apply-

(a) section 24(secondary nature of partner's liability), and

(b) subsections (I), (2) and (4) of section 25 (partner's secondary liability: supplementary) .

Non-partners who are liable by holding out

11 (1) Section 26 applies but with the following modifications.

(2)Insubsection(4),for"Sections23(2)to(5),24and25apply"substitute

"Section 23(2) applies".

(3) In subsection (6), omit "the partnership or".

Changes in partners

12 (1) The following provisions do not apply-

(a) section 27 (admission of new partners),

(b) section 28 (how persons cease to be partners),

(e) section 31 (power to expel partner),

(f) section 32 (realisation of former partner's share (other than on

winding up)), and

(g) section 34 (former partners: indemnity and contribution, and return of property).

(2) Section 33 (liability of former partner for obligations incurred while a

partner) applies but with the substitution for subsection (2) of -

"(2) Section 23(2) applies to a former partner as it applies to a partner."

Break up of partnership

13 (1) This paragraph applies instead of section 38 (events which break up a partnership) .

(2)Subject to any agreement between the partners, a partnership breaks up if -

(a) in the case of a partnership of defined duration (i) the specified period expires, or

(ii) the venture is accomplished;

(b) in the case of any other partnership, a general partner gives notice to

the other partners of his intention to break up the partnership.

(3) Subject to any agreement between the partners, a partnership breaks up if a partner dies or (if not an individual) is dissolved.

(4) A partnership breaks up if an order under section 47(1)(c), 49 or 53(2)(d) (order breaking up partnership) has effect in relation to it.

The following provisions do not apply -

(a) subsection (2) of section 39 (effects of break up), and

460

EXPLANATORY NOTES

Under paragraph 12 the provisions in the Bill relating to the admission of partners and in relation to persons ceasing to be partners are inapplicable to a special limited partnership. Many of these provisions are inapplicable to a special limited partnership as there is no entity that exists outside the individual partners considered together. Thus, when an individual partner leaves the partnership, the partnership breaks up. Under the 1890 and 1907 Acts this was called a 'technical dissolution' (dissolution under those Acts being called 'break up' under the draft Bill). A new partnership may form immediately afterwards, consisting of all the partners in the old partnership, except the departed partner. However, in accordance with existing English law, this will be a new partnership. See the report, paragraphs 19.18 - 19.20.

Paragraph 13(2)(b) replicates the existing law that, as a default rule, notice to terminate a partnership cannot be given by a limited partner (1907 Act, s 6(5)(e)).

461

Partnerships Bill

Schedule 10 - Special limited partnerships

(b) section 40 (restriction on ceasing to be a partner on or after break up).

Protection for property acquired after break up

15	Section42doesnotapply.

Distribution of partnership's assets on winding up

16 (1) Section 44 applies but with the following modifications. (2) In subsection (1) (b), omit "before its dissolution".

(3) Omit subsections (4), (5)(a) and (6).

Dissolution

17	Section45doesnotapply.

Court's powers in relation to partnerships

18 (1) Section 47 (order breaking up partnership) applies but with the following modifications.

(2) Subsections (1) (a) and (b) and (3) do not apply.

(3) Subsection (2) applies only for the purposes of subsection (4)(a).

19(1) Schedule 3 (orders under section 47: supplementary provisions) applies but

with the following modifications.

(2) Omit paragraph 1(1)(a) and (2). (3) In paragraph 3-

(a) in sub-paragraph (1) (b), omit "in the case of an order under section

47(1)(c),",and

(b) omit sub-paragraph (2).

(4) In paragraph 4(3), omit "If the order is made under section 47(1) (c),".

20 (1) Section 48 (section 47: interim orders) applies but with the following modifications.

(2) Insubsection (1)(a), for "section 47(1)(a) for the removal of a partner ("P")

from a partnership" substitute "section 47(1)(c) for the break up of a partnership on the ground that one or more ofthe grounds in section 47(2) (a) to (e) applies in relation to a partner ("P")".

(3) In subsection (2), for "section 47(1)(a)" substitute "section 47(1) (c)".

Limited and general partners

21	Subsection(3)(b)ofsection54doesnotapply.

Default rules about changes in partners in limited partnership

22	Subsections(1)and(2)ofsection60donotapply.

Default rule about break up of limited partnership

Subsection (1) of section 61 does not apply.

462

EXPLANATORY NOTES

Paragraph 17 is necessary because under the draft Bill a special limited partnership will not dissolve. Dissolution under the draft Bill refers to the point at which the partnership entity ceases to exist. A special limited partnership is not an entity. If the partners wish the partnership to cease it will break up. This is all that needs to occur to end the 'partnership' as the partnership is defined as the relation between the partners. The authority of the individual partners continues for the limited purpose of winding up the affairs of the former partnership and dealing with the property (clause 43). See the report, paragraphs 19.18 - 19.20.

Paragraph 18 also reflects the fact that a partner leaving a special limited partnership effects a break up of that partnership (see the notes above on Schedule 10, paragraph 12). Therefore, there is no difference between an order that a partner leave the partnership and an order breaking up the partnership, as an order that a partner leave the partnership would cause a 'technical' break up. For this reason clause 47(1)(a) and (b) has been disapplied in relation to a special limited partnership.

In paragraph 19 similar changes are made to Schedule 3 to make it applicable to special limited partnerships. For example, as in paragraph 18 of Schedule 10, Schedule 3, paragraph l(1)(a) has been disapplied because the date at which a person ceases to be a partner under paragraph l(1)(a) will be the same as the date on which the partnership breaks up under paragraph l(1)(b).

Paragraph 20 also makes changes that are necessary because the removal of a partner from a special limited partnership is equivalent to a break up of that partnership (see notes to paragraph 12).

Paragraph 21 is necessary because the concept of dissolution is not applicable to special limited partnerships (see the notes above on Schedule 10, paragraph 17).

As with paragraph 12, paragraphs 22 and 23 disapply default rules. This is because the Bill does not, for the most part, provide a system of default rules for special limited partnerships. See the report, paragraph 19.12.

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Partnerships Bill Schedule 10 - Special limited partnerships

Registered office of limited partnership

24	Section 62 applies but with the omission of paragraph (b) and the word "or"

before it.

Application for registration of special limited partnership

25(1) Section 66 applies but with the following modifications.

(2) In subsection (1) -

(a) omit "partnership or", and

(b) for "limited partnership" substitute "special limited partnership".

(3) In subsection (2)(a), for "limited partnership" substitute "special limited

partnership".

(4) In subsection (3), omit paragraphs (c) and (e).

Registration of special limited partnership and registration certificate

26 (1) This paragraph applies instead of section 67.

(2) On receiving an application for the registration of a proposed partnership as

a special limited partnership, the registrar must, if satisfied that sections 62,

63 and 66 are complied with-

(a) register it as a special limited partnership, and

(b) supply it with a registration certificate signed by him.

(3) The registration certificate must record-

(a) the name of the partnership (as specified in the application for

registration),

(b) the fact of its registration as a special limited partnership, and (c) the date of registration.

(4) The partnership is formed when it is registered.

(5)There is no need to re-register a partnership merely because of a change in

the partners.

Registration of changes and corrections

27 (1) Schedule 7 applies but with the following modifications.

(2) In paragraph 2(1), omit paragraph (b) and the word "or" before it. (3) Omit paragraph 4(1) (b).

Deregistration

28 (1) Schedule 8 applies but with the following modifications.

(2) In paragraph 1-

(a) omit sub-paragraph (2)(b),

(b) in sub-paragraphs (3)(a) and (5), omit "or (b)", and (c) omit sub-paragraph (6).

(3) In paragraph 2-

(a) omit sub-paragraph (2)(a),

464

EXPLANATORY NOTES

Paragraph 24 is necessary because special limited partnerships are governed by the law of England and Wales, thus the registered office must be in England or Wales. See clause 80(3)(e) of the draft Bill.

Paragraph 25 modifies clause 66 of the draft Bill to provide a process by which people can apply to register a special limited partnership. See the report, paragraph 19.21. Clause 66(3)(e) has been disapplied because it will not be possible for a pre-existing entity partnership to register as a special limited partnership. A special limited partnership is formed by registration and cannot have any existence outside the register. A mechanism to allow pre-existing English or Welsh limited partnerships to register as special limited partnerships will be provided by transitional provisions. However, this option will only be available during the 2-year transitional period.

Paragraph 26(4) is the equivalent rule to clause 67(3) but adapted for special limited partnerships. A special limited partnership will not have been able to begin trading prior to registration. This is because there is no provision in the Bill for a non-entity general partnership. Because a limited partnership becomes a limited partnership upon registration, the only way a limited partnership can begin trading prior to registration is as a general partnership. This paragraph clarifies that registration is sufficient to constitute carrying on business, given that prior to registration the partnership had not begun to carry on business. This means that all the elements of a partnership are present post-registration. (Even during the transitional period, a limited partnership under the 1907 Act which becomes a special limited partnership will not have begun trading as a special limited partnership under the new Bill prior to registration, see the report, part XIV, XIX.)

As is noted above, paragraph 26(4) (or its equivalent for limited partnerships, clause 67(3)) necessitates Schedule 8, paragraph 2(2)(d) (to allow for de-registration of limited partnerships that never begin trading). Schedule 8, paragraph 2(2)(d) is itself modified by Schedule 8, paragraph 2(4) (which provides an exception for newly registered limited partnerships). It should be noted that Schedule 8, paragraph 2(4) also applies to special limited partnerships. (See the notes above on Schedule 8, paragraph 2, and particularly sub-paragraph (4).) This means that special limited partnerships also get the benefit of the two-year period before they are susceptible to being de-registered on the grounds of not having started to carryon a business with the object of making a profit.

Although a partner leaving or joining the firm causes a break up, it is not practicable to require a special limited partnership to fully re-register as a new partnership each time there is a change in the partners. In the 1907 Act this appeared to be the implication of section 9(1)(d), which allowed the change in partners to be registered, rather than requiring the 'new' partnership to re-register anew. This effect has been clarified in paragraph 26(5). See the report, paragraph 19.21.

Paragraph 27(2) has been included because the special limited partnerships part of the Bill is only applicable to England and Wales (see clause 80(3)(e) of the draft Bill). Paragraphs 27(3) and 28 have been included to take account of the fact that the concept of dissolution is not applicable to special limited partnerships (see the notes above on Schedule 10, paragraph 17).

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Partnerships Bill

Schedule 10 - Special limited partnerships

(b) in sub-paragraph (2)(d), for "section 67(3)" substitute "paragraph 26(4) of Schedule 10", and

(4) For paragraph 5(3) and (4) substitute-

"(3)On deregistration -

(a) if it has not already done so, the limited partnership breaks up, and

(b) each general or limited partner becomes a partner with unlimited liability."

(5)Inparagraph6(1)(c),for"section67"substitute"paragraph26ofSchedule

10".

Evidence

29	Section 71 applies but with the substitution, in subsection (l)(b), of "special

limited partnership" for "limited partnership".

Interpretation of Part3

30 (1) Section 72 applies but with the following modifications. (2) In subsection (I), in the definition of "the Gazette"-

(a) omit paragraph (a), and

(b) in paragraph (b), omit "otherwise,".

(3)Insubsection(I),in the definition of "theregistrar" -

(a) in paragraph (a), omit "if the registered office is, or is to be, in England or Wales,", and

(b) omit paragraph (b) and the word "and" before it.

Interpretation

31(1) Section 76 applies but with the following modifications to subsection (1).

(2) In the definition of "business", for "section 1(6)" substitute "paragraph 3(6) of Schedule 10".

(3) In the definition of "partnership", for "section 1(2)" substitute "paragraph 3(3) of Schedule 10".

(4) After the definition of "partnership" insert -

""a partnership" has the meaning given by paragraph 3(4) of Schedule 10i" .

(5) In the definition of "partnership agreement", for "section 1(1)" substitute "paragraph 3(2) of Schedule 10".

(6) In the definition of "partnership property ",for" section 17(1)" substitute

"paragraph 7(2) of Schedule 10".

(7) For the definition of "trust property", substitute-

""trust property" means property which, in the course of the partnership business, is held by one or more partners in trust for a

thirdpersoni".

466

EXPLANATORY NOTES

Paragraph 28(4) makes provision for the status of a de-registered special limited partnership. Under paragraph 28(4) de-registration triggers break up. This means that the partnership is ended. However, the authority of the partners may continue for the limited purpose of winding up the partnership's affairs and distributing any partnership property (clause 43(2)).

As to paragraph 29, see paragraph 15.24 of the report regarding the status of the certificate of registration. T his is equally applicable to special limited partnerships.

Paragraph 30 is needed because the special limited partnerships part of the Bill is only applicable to England and Wales (see clause 80(3)(e) of the draft Bill).

The purpose of paragraph 31 is to alter references in the definition provision (clause 76) by substituting the relevant provision in Schedule 10. It also alters the definition of "trust property" to fit the aggregate status of the special limited partnership.

467

Partnerships Bill Schedule 11 - Amendments of the Business Names Act 1985

SCHEDULE 11

Section 75

AMENDMENTS OF THE BUSINESS NAMES ACT 1985

1	The Business Names Act 1985(c.7) is amended as follows.

2	(1) Section 1(1) (persons subject to this Act) is amended as follows.

(2) Inparagraph (a), after "partnership" insert "(other than a limited

partnership)".

(3) After paragraph (a), insert-

"(aa) in the case of a limited partnership, does not consist of its registered name, without any addition other than one so

permittedi".

3	Insection 2 (prohibition of use of certain business names) for subsection (4)

substitute -

"(4) If a partnership which is a legal person contravenes subsection (I), each of the partners (or, in the case of a limited partnership, each of

the general partners)is guilty of an offence.

(5) If any other person contravenes subsection (I), that person is guilty of an offence."

4	(1) Section 4 (disclosure required of persons using business names) is amended

as follows.

(2)Insubsection(1)(a)-

(a) in sub-paragraph (i), after "partnership" insert "(other than a limited partnership)", and

(b) after sub-paragraph (i), insert-

"(ia) in the case of a limited partnership, its registered

name and the name of each general partner, ".

(3) In subsection (3), after "business" (in both places) insert "(or, in the case of a limited partnership, its registered office)".

(4) For subsection (6) substitute-

"(6) If a partnership which is a legal person contravenes subsection (1) or

(2), each of the partners (or in the case of a limited partnership, each

of the general partners) who without reasonable excuse procured or permitted the contravention is guilty of an offence.

(6A) If any other person contravenes subsection (1) or (2), that person is guilty of an offence."

(5)Insubsection(7),after"partner"insert"(or, in the case of a limited

partnership, any general partner)".

5	(1) Section 7 (offences )is amended as follows.

(2) In subsection (3), after "4(6)" insert "or (6A)". (3) In subsection (4), after "4(6)" insert ", (6A)".

(1) Section 8 (interpretation) is amended as follows.

(2) In subsection (I), after the definition of "lawful business name" insert ""limited partnership" includes a foreign limited partnershipi".

468

EXPLANATORY NOTES

Schedule 11

The Business Names Act 1985 (BNA) imposes additional requirements upon businesses that wish to trade in Great Britain under a name that is not their usual name. For a company or LLP the usual name is the registered corporate name. Thus, a company will fall within the scope of the BN A if it trades under a name other than its registered name. A partnership will fall under the BN A if the partnership name is not made up of all the surnames (or corporate names where there are corporate partners) of the partners.

The amendments in Schedule 11 alter the way that partnerships become subject to the BN A. Limited and general partnerships will now be treated slightly differently from each other under the BN A, due mostly to the fact that limited partnerships have a registered name. The Schedule also clarifies who is the subject of the BN A (see paragraph 6(3) and notes below).

A limited partnership becomes registered under a registered name. This mayor may not be made up of the surnames and/or corporate names of the partners. All limited partnerships are required under clause 65 to include their registered name on all partnership documents. It is appropriate that a limited partnership only becomes subject to the BN A when it is trading in Great Britain under a name that is not its registered name. T his is the effect of paragraphs 1 and 2. See the report, paragraphs 13.23 - 13.24 and 15.72 - 15.75.

Paragraph 3 alters the offence provisions of section 2 of the BNA so that where an entity partnership (a general or limited partnership) contravenes section 1 of the Act it is the partners that are guilty of the offence. T here is a further modification for limited partnerships where paragraph 3 makes the general partners guilty of the offence and not the limited partners. Partners in a special limited partnership would fall within the new section 2(5) of the BNA. See clause 8 of the draft Bill.

Paragraphs 4(1) and (2) alter section 4 of the BN A to take account of the fact that a limited partnership has a registered name: limited partnerships are required to include their registered name on the documents listed in the BN A (section 4(1)(a)) rather than the names of all the partners.

Paragraph 4(3) replaces 'principal place of business' with 'registered office' for limited partnerships. See the report, paragraphs 15.30-15.34.

Paragraphs 4(4) and 4(5) alter the offence provisions similarly to paragraph 3. See note above.

Section 8 of the BN A currently states that "partnership" includes a foreign partnership.

Paragraph 6 includes the equivalent provision for a limited partnership.

469

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You are here: BAILII >> Databases >> Scottish Law Commission >> Scottish Law Commission (Reports) >> Partnership Law [2003] SLC 192(APPENDIX_A) (Report) (November 2003) URL: http://www.bailii.org/scot/other/SLC/Report/2003/192(APPENDIX_A).html Cite as: [2003] SLC 192(APPENDIX_A) (Report)

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