INTRODUCTION

When two or more people come together in a business enterprise they need some basic rules to govern their relationship. A state should provide a basic legal framework governing the relations of the partners internally and with outside parties. Accordingly, in Sri Lanka the law governing partnership is English law. The English law of partnership was adopted in to Sri Lanka when it was colonized by British. Therefore, there was no necessary to follow the legal concept of ‘’Societas’’[1] under the Roman Dutch law. The incorporation of English law is clearly explained by Section 3 of the Civil Law Ordinance No 5 of 1852 as following manner:

‘’In all questions or issues which have to be decided in Sri Lanka with respect to the law of partnerships, the law to be administered shall be the same as would be administered in England in the like case’’.[2]

Thus the UK Partnership Act of 1890 forms the basis of partnership law in Sri Lanka. Not only the English statute law but also the rules of common law and equity relating to partnerships continue to play an important role in the law of partnership in Sri Lanka which is evident from the case of Soosaipillai v Vaithilingam[3].

Moreover, apart from the English law of partnership, Sri Lanka has own statute on partnership called as Partnership Ordinance No 21 of 1866. However, compare with English Partnership Act of 1890 it is not deemed as a comprehensive legislation because it only contains seven sections[4] and even it does not define the term of ‘’partnership’’. In addition, there are several statutes in Sri Lanka which regulates the partnership relations. Sec 2 of the Sri Lankan Business Names Act of 1987 provides that every firm having a place of business name which does not consist of the true full names of all the partners who are individuals and the corporate names of all partners who are corporations, shall be registered in the manner directed by this act. Sec 18 of the Prevention of Frauds Ordinance No 7 of 1840 mandates that where the capital of the partnership exceeds one thousand rupees, partnership agreement should be in writing. Sec 519 (1) of the Sri Lankan Companies Act limits the maximum number of partners as twenty in a partnership.

THE DEFINITION OF PARTNERSHIP

Sec 1 (1) of the Partnership Act of 1890 defines as follows: ‘’Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.’’

From this definition it can be inferred that certain preconditions should be met in order to create a partnership those are: There must be an agreement: Partnership arises out of an agreement between the partners[5]. The agreement may be formal or it may be inferred from the conduct from the partners. Through the agreement of the partnership partners can determine the capital contribution, profits and loss ratio, remuneration of the partners, rights and duties of the partners, duration of the partners, etc. Nevertheless, the section 1 (1) of the Partnership Act of 1890 makes no express reference to the writing requirement of the agreement, section 18 of the Prevention of Fraud Ordinance, makes clear that, if the capital of a partnership exceeds one thousand rupees the partnership should be in writing. However, a third party may prove a partnership relationship through verbal evidence to collect due amounts from partners.[6]

Carrying on business with a view of profit: This requirement distinguishes the partnership from other non-business organizations. The term “Business” is widely defined as including “every trade, occupation, or profession”.[7]

The business must be carried on by persons in common: there must be at least two persons to carry out partnership business and the maximum number of partners is restricted by twenty partners.[8] That business should be operated by or on behalf of all the partners.

PARTNERSHIP AND LEGAL PERSONALITY

A partnership is not an entity or body corporate under the English law namely, it is not a distinct body and there is no separation between partnership and partners who composed it.  As a result, a partnership, cannot acquire rights, cannot be incurred to obligations and cannot hold property. Thereby, the rights and liabilities of a partnership are vested with each of the partners as the individual rights and liabilities.

Generally a partnership is referred as the “firm”. The nature of the firm was well pointed out by Farwell J in Sadler v Whiteman[9] as ‘’ a firm as such has no existence: partners carry on the business both as principals and as agents for each other within the scope of the partnership business. It is not correct to say that a firm carries on a business the members of the firm carry on the business in partnership under the name of and style of the firm’’. This is called as the “aggregate” approach to partnership. If a legal action is brought against a firm, it must be instituted against all the partners by name.[10]

As a consequence, if a partner dies or withdraws or if a new partners joins in the partnership which will destroys the identity of the firm.[11] It is a serious defect of the 1890 Act that it provides no simple means to extend the life of a partnership, on a change of partners, and no presumption in favour of continuity. In English law, whenever the membership changes the partnership is in theory dissolved, and a new partnership created.[12] It is further argued that the law of partnership fails the reasonable expectations of business men.[13]

There are two possible ways to encourage the continuity of a partnership, first one is offering the independent legal personality status to partnership, and other one is when a partner dies or leaves, allowing the partnership to continue between the remaining partners.

THE AGENCY AND LIABILITY OF A PARTNER

THE AGENCY OF A PARTNER

Under the partnership act of 1890, every partner is an agent of the firm and his other partners within the scope the partnership’ business.[14] The partner’s agency or power to bind the partnership arises from the status as partner and not from an agency contract. Moreover, a partner acts in a dual capacity, as agent for the partners collectively and as agent of the other partners in their individual and separate capacities.[15] It is the pure form of mutual agency.

Section 5 of the 1890 Act provides that, a partner who acts within the scope of his actual authority (express or implied) will bind the partnership and a partner has implied authority to bind the partnership when he does anything which would be usual in the course of carrying on partnership business. However, if a partner has acted out of his authority or the third party, knows that the partner has no authority, or does not know he is a partner, acts of that partner will not bind the firm. Moreover, a partnership is bound by an act or instrument relating to the business of the partnership and done or executed in the firm-name by a partner or other person who is authorised to do so.[16] Nonetheless, a partnership may effectually restrict the power of a partner to bind the partnership by giving notice of the restriction to third parties.[17]

The mutual agency between the partners is one of the unattractive or risky feature of the traditional partnership because sometimes this agency relationship causes absurd result to the innocent partners. For example, if an accountant who is a partner of an accountancy firm acted negligently when making financial reports which is come to the scope of the partnership’s usual business, then not only the negligent partner but also the other innocent partners also liable. Namely, one partner’s wrongful acts within the scope of the ordinary business of the partnership will bind other innocent partners.[18] This absurd situation necessitates the need for limited liability and separate legal personality status in partnership. Namely if a partnership becomes as a separate legal entity, a partner should be the agent of the partnership and not the partners, there is no agency relationship between partners. Only the partnership will be liable for the wrongful acts of a partner if he committed those acts within the ordinary course of business of the partnership. However, a partnership will not be bound if the partner has no authority to do the thing on behalf of the partnership or his act was not within the scope of the partnership ordinary business.

THE LIABILITY OF THE PARTNERSHIP FOR OBLIGATIONS INCURRED BY A PARTNER

Sec 10 of 1890 Act provides that, the partnership is liable for the wrongful acts of a partner who acted in the ordinary course of the business of the firm. This section does not extend the liability of the partnership for loss or injury caused to another partner in the same partnership, only covers other persons. In addition, the 1890 Act also contains provisions on the liability of the partnership: for the misapplication of money or property received for the partnership or in its custody[19]; and in relation to the improper employment of trust property for partnership purposes.[20]

 THE LIABILITY OF PARTNERS FOR THE OBLIGATIONS OF THE PARTNERSHIP

Lord Lindley summarized the commercial view of partnership in these words:  ‘’The partners are the agents and sureties of the firm: its agents for the transaction of its business; its sureties for the liquidation of its liabilities so far as the assets of the firm are insufficient to meet them. The liabilities of the firm are regarded as the liabilities of the partners only in case they cannot be met by the firm and discharged out of its assets’’.[21]

According to the above quotation, the underpinning of the general partnership is that the partners have unlimited liability for the obligations incurred by the partnership, they are jointly liable with one another.[22] The creditors can extend their hands to the personal property of the partners for partnership debt. Even a creditor can recover a partnership debt by enforcement against a partner’s assets without first enforcing against and exhausting the assets of the partnership.

Unlimited liability of the partners is the major inherent demerit in the general partnership. Because of this risky feature, investors or professionals or entrepreneurs are reluctant to form their business in the nature of partnership in Sri Lanka. Also after the introduction of the limited liability company concept in Sri Lanka, the general partnership gradually has lost its demand. Despite, the private limited company may be an alternative for the general partnership, the members of the private limited company do not enjoy the flexibility and informality of a partnership because partnership is a sui generis business structure which is different from other business organizations. Thus there is a need or vacuum to introduce the concept of limited liability in partnership along with its existing unique features.

THE LIABILITY OF THE INCOMING PARTNER

A person who is admitted as a partner into an existing partnership does not thereby become liable to the creditors of the partnership for anything done before he became a partner.[23] Admission into a partnership will not affect the private assets of the incoming partner to the claims of creditors in respect of existing obligations. However, the incomer’s private assets will be exposed indirectly to the claims of prior creditors if the partnership of which he is a member grants an indemnity to an outgoing partner.[24]

THE LIABILITY OF THE OUTGOING PARTNER

A partner who retires from a partnership does not thereby cease to be liable for partnership debts or obligations incurred before his departure.[25] The retiring partner can be released from such obligations by agreement with the other partners and the creditors of the partnership.[26] Moreover, a retiring partner will be liable for obligations incurred by his former partners after he leaves the partnership unless he gives notice of his withdrawal to any third party with whom the former partners deal.[27] In addition, an outgoing partner may incur liability to anyone if he allows himself to be represented as a partner in the partnership and anyone acts in reliance on that representation.[28]

PARTNERSHIP PROPERTY

Partnership is not a separate legal person thereby it can’t own property separately from partners. However, the English law adopts the ‘’aggregate’’[29] approach to distinguish between property held for the partnership and the property of its individual members. This distinguishing is important to meet the claims of the creditors of the firm and individual partners. This status depends on the agreement, express or implied, between the partners. If there is no express agreement sections 20 and 21 of the 1890 Act set out the factors which will generally be relevant.[30] In English law title to land held by a partnership can be vested in no more than four partners.[31] If a partnership has more than four partners, the legal right of the land is vested with some of the partners as a trust for themselves and other partners according to their respective interests.

MANAGEMENT AND FINANCIAL RIGHTS OF PARTNERS

Section 24 of the 1890 Act covers the management and financial rights of partners in a partnership. Generally, partners are entitled to share equally in the capital and profits of the business and must contribute equally to the losses which a partnership sustains.[32] However, if partners specifically indicated this matter in their agreement this default rule under Sec 24 has no application.  A partner has the right to be indemnified against losses and expenses incurred for the benefit of the partnership.[33]  Moreover, a partner is not entitled to interest on the capital contributed to the partnership.[34] But a partner is entitled to simple interest at 5% on any payment or advance made to the partnership in addition to his capital contribution.[35] Section 24 (5) provides that every partner may take part in the management of the partnership business. Regarding the decision making system of a general partnership, ordinary matters connected with the partnership business may be decided by majority of the partners.[36] But the 1890 Act does not define what is meant by an ordinary matter connected with the partnership business. The admission of a new partner and any change in the nature of the partnership business require the consent of all existing partners.[37] Rules under the section 24 are default which may be varied by the consent of all the partners, and such consent may be either express or inferred from a course of dealing.[38]

DUTIES OF PARTNERS

The mutual trust and confidence between the partners is the foundation of a partnership which creates a fiduciary relationship between them. Thereby a partner must display the utmost good faith towards his fellow partners in all partnership dealings. In Gordon v Holland[39] the Court held that a partner owes his co-partners a duty to be honest in his dealings with third parties, even if the transactions are not of a partnership nature. The 1890 Act contains the following fiduciary duties of a partner, a partner must give any of his partners true accounts and full information of all things affecting the partnership[40], a partner must account to his partners for any profit which he obtains without their consent from any transaction concerning the partnership or from his use of partnership property[41] and a partner who carries on a competing business of the same nature as the partnership’s business without his partners’ consent must account for any profits made by him in that business.[42] Besides, there are other fiduciary duties of a partner in general law.[43] It is important to note that in English partnership law a partner only owes fiduciary duties towards his fellow partners, not to the firm because the partnership is not a separate legal person.

DISSOLUTION OF PARTNERSHIP

The existence of the partnership comes to end on the following grounds: expiration of the fixed term[44], termination of a single adventure or undertaking for which the partnership was entered into, subject to any agreement between the partners[45], notice by one partner of intention to dissolve the partnership where the partnership was entered into for an undefined time[46], bankruptcy or death of a partner[47], carrying unlawful business[48], dissolution by the court on one of the statutory grounds set out in section 35 of the 1890 Act.[49] Even after the dissolution of a partnership the authority of the partners to bind the partnership and the other rights and obligations of the partners continue notwithstanding the dissolution but only so far as necessary to wind up the affairs of the partnership.[50]

SUMMATION

In short, partnership is one of the oldest form business structure in Sri Lanka and it is regulated by the English law of partnership. Even Sri Lanka has own statute on Partnership, it does not contain comprehensive legal provisions to regulate the partnership. Therefore, the entire partnership law of Sri Lanka is depended on the UK Partnership Act of 1890. Compare with other business organizations in Sri Lanka, the usage of the partnership structure has been diminished due to the features of the traditional partnership: the unlimited liability of the partners, personal liability of the innocent partners for the co-partner’s wrong or negligence and lack of perpetual succession. For this reason, a need was felt to reconstruct the partnership structure in Sri Lanka with the limited liability protection and the corporate personality status.

[1] The societas (Roman Law Concept) was an association of persons that could be established to pursue any goal, ranging from personal affairs to purely financial relationships. Examples for businesses organized as a societas included the provision of financial services (as so-called argentarius), maritime transport (as so-called exercitor), and joint trading in oil (oleum), wine (vinum), grain (frumentum), slaves (mancipium), or clothes (sagaria). It is most remarkable that all sources, despite the diversity of the businesses conducted, have one thing in common.

[2] Section 3 of the Civil Law Ordinance No 5 of 1852.

[3] 37 NLR 381.

[4] This ordinance, does not deal with the general principles of partnership law, only excludes certain type of persons from the definition of partner; Sec 3- Lender not a partner by advancing’ money for share of profits, Sec 4- Remuneration of agents, &c., by profits not to make them partners, Sec 5- Certain annuitants not to be deemed partners, Sec 6- Receipt of profits, &c., not to make the seller a partner, Sec 7- In case of bankruptcy, &c., lender not to rank, as respects profit or interest, with other creditors.

[5] R C I’Anson Banks (editor), Lindley & Banks on Partnership (18th ed 2002), para 2-13.

[6] See Commissioner of Income Tax v Alaudin (1953) 54 NLR 385.

[7] Sec 45 of the Partnership Act of 1890.

[8] Sec 519 (1) of No 7 of 2007 of Sri Lankan Companies Act.

[9] 1910 (1) KB 862.

[10] Suppiah v Pulliapillai (1911) 14 NLR 392.

[11] Lord Lindley quoted in Lindley & Banks on Partnership (18th ed 2002) para 3-04; and see Green v Herzog [1954] 1 WLR 1309.

[12] M Twomey, Partnership Law (2000 Butterworths Irish Law Library) paras 8.23, 23.07ff.

[13] Ibid, op cit p 8.02.

[14] Sec 5 of the Partnership Act of 1890.

[15] R C I’Anson Banks (editor), Lindley & Banks on Partnership (18th ed 2002) (at para 12-05).

[16] Sec 6 of the Partnership Act of 1890 and, Re Briggs & Co, ex p Wright [1906] 2 KB 209.

[17] Sec 8 of the Partnership Act of 1890.

[18] See Mercantile Credit Co Ltd v Garrod (1962) 3 A11 ER 1103.

[19] Sec 11 of the Partnership Act of 1890.

[20] Sec 13 of the Partnership Act of 1890.

[21] Quoted in Lindley & Banks on Partnership (18th ed 2002), para 3-02.

[22] Sec 9 of the Partnership Act of 1890.

[23] Sec 17 (1) of the Partnership Act of 1890.

[24] See Gray v Smith (1889) 43 Ch D 208, 213 and Lindley & Banks, para 10-247. If the former partner withdrew before the incoming partner joined the partnership, the indemnity may not be a liability for which the incoming partner is personally liable; but if the partners gave the indemnity when the incoming partner had joined the firm, he may be personally liable for that debt.

[25] Sec 17 (2) of the Partnership Act of 1890.

[26] Sec 17 (3) of the Partnership Act of 1890.

[27] Sec 36 (1) of the Partnership Act of 1890.

[28] Sec 14 (1) of the Partnership Act of 1890.

[29] Aggregate theory of partnership is a theory which states that a partnership does not have a separate legal existence such as a corporation. Under the aggregate theory of partnership, partnership is only the totality of the partners who make it up.

[30] Sec 20 (1) – All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.

Sec 21 – Unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm.

[31] Trustee Act 1925, s 34(2); Law of Property Act 1925, s 34(2): no more than four persons can hold the legal title to land.

[32] Sec 24 (1) of the Partnership Act of 1890.

[33] Sec 24 (2) of the Partnership Act of 1890.

[34] Sec 24 (4) of the Partnership Act of 1890.

[35] Sec 24 (3) of the Partnership Act of 1890.

[36] Sec 24 (8) of the Partnership Act of 1890.

[37] Sec 24 (7), (8) of the Partnership Act of 1890.

[38] Sec 19 of the Partnership Act of 1890.

[39] (1913) 108 LT 385.

[40] Sec 28 of the Partnership Act of 1890.

[41] Sec 29 of the Partnership Act of 1890.

[42] Sec 30 of the Partnership Act of 1890.

[43] A partner should not make a secret profit in the course of the sale to or purchase from his firm and must account for such profit (Gordon v Holland (1913) 108 LT 385.), A partner will be liable to account if he secures a personal benefit which should, as a consequence of his duties to his fellow partners, be obtained for the benefit of the firm (Powell and Thomas v Evan Jones & Co [1905] 1 KB 11) and A partner’s use of information received in the course of the partnership business to secure a personal benefit will give rise to a similar obligation (Boardman v Phipps [1967] 2 AC 46).

[44] Sec 32 (a) of the Partnership Act of 1890.

[45] Sec 32 (b) of the Partnership Act of 1890.

[46] Sec 32 (c) of the Partnership Act of 1890.

[47] Sec 33 (1) of the Partnership Act of 1890.

[48] Sec 34 of the Partnership Act of 1890.

[49] (a) When a partner is incapable of managing the firm’s affairs by reason of mental disorder, any other partner may so apply.

(b) When a partner, other than the partner suing, becomes in any other way permanently incapable of performing his part of the partnership contract:

(c) When a partner, other than the partner suing, has been guilty of such conduct as, in the opinion of the Court, regard being had to the nature of the business, is calculated to prejudicially affect the carrying on of the business:

(d) When a partner, other than the partner suing, wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with him:

(e) When the business of the partnership can only be carried on at a loss:

(f) Whenever in any case circumstances have arisen which, in the opinion of the Court, render it just and equitable that the partnership be dissolved.

[50] Sec 38 of the Partnership Act of 1890 and see Thompson’s trustee in bankruptcy v Heaton (1994) WLR 605.