Introduction:
A partnership business is a voluntary association of two or more persons who jointly own or carry business on a business with the sole aim of making profit…per Rhodes-Vivour J.S.C in Alade v. Alic (Nig.) Ltd. (2010) 19 NWLR (Pt.126) 111 at pg. 143 para H.
The clear understanding of the above definition is that there are three essential ingredients for a partnership namely: a). Partnership is a “business”; b). There must be common interest (i.e. consensus as idem) for a Partnership business to thrive, and, c). The Partnership must be profit oriented.
Thus, partnership is relationship in its own right with a separate legal personality and not an organization or company. See the case of Salomon v. Salomon (1897) AC 22. The key difference between a partnership and a company is that a ‘Partnership’ does not confer any limited liability on the partners. Thus, it is possible for each partner to be liable without limit for debts incurred by the other partners in the course of the partnership business unless it is expressly stated in the partnership agreement as to the percentage of each partner’s liability to the Partnership business; whereas in a company, there is a percentage of liability to which each director can incur in the course of running the affairs of the company.
This newsletter espouses the misleading simplicity of Partnership vis-à-vis other forms of business association freely entered into by individuals in Nigeria and more so to enlighten the society about the rights and duties of parties in a Partnership under the Nigerian law.
History of Partnership law:
Partnership law developed in a very traditional way through the courts, both of common law and equity in England, particularly during the latter half of 19th century and has been exported into other countries like Canada, Australia, New Zealand and South Africa. Partnership Law Amendment Act 1865 (known as Bovill’s Act) was a brief statutory incursion aimed at clarifying the distinction between partners and their creditors, but in 1890 the Partnership Act was passed based on a Bill drafted by Sir Frederick Pollock in 1879. This Act forms the basis of Partnership law toady and has remained virtually unscathed through a century of change. In Partnership Act of 1890, partners are more than contracting parties, they had been established by the courts of equity as owing fiduciary duties to each other by the time of the Act, and developments in the new law of equity in recent times have strengthened rather than diminished such duties. In essence, partners are expected to behave towards each other as if they were trustees for each other, making full disclosure and being scrupulously fair in their dealings.
Partners are therefore, contractors, agents, principals, fiduciaries and beneficiaries all at the same time. It is imperative to note that one recent innovation to Partnership agreement is that there must be a clause for arbitration in the case of a dispute.
What is Partnership?
Partnership has been defined by Geoffrey Morse in his book titled: Partnership Law, at pg.1 4th Edition, Blackstone Press Limited, 1998 as: “a business, carried on in common and with a view of profit”. Furthermore, section 1(1) of the Partnership Law CAP. P1, Laws of Lagos State of Nigeria, 2015 defines Partnership as follows:
“1(1) – Partnership is the relationship which subsists between persons carrying on a business in common with a view to profit.”
However, section 19 of the Companies and Allied Matters Act, CAP.C20 Laws of the Federation of Nigeria, 2004 states that:
“19 (1) – No company, association, or partnership consisting of more than 20 persons shall be formed for the purposes of carrying on any business for profit or gain by the company, association, or partnership or by the individual members thereof, unless it is registered as a company under this Act, or is formed in pursuance of some other enactment in force in Nigeria”.
It is important to note that, section 19 (2) (b) of CAMA provides that:
“19 (2) – Nothing in this section shall apply to –
(b) – any partnership for the purpose of carrying on practice –
- As legal practitioners, by persons each of whom is a legal practitioner; or
- As accountants by persons each of whom is entitled by law to practice as an accountant”.
Advantages:
The foundation of partnership is mutual faith and trust in each other. Partners are said to be in a fiduciary position towards each other as if each were a trustee and the other partners were beneficiaries under a trust. In essence, partners enjoy the benefit of: a). Honest and full disclosure; b). Partners cannot make unauthorized personal profit; c). Partners have specific duty, as against conflict of interest; d). Partners enjoy hierarchy in management and control of the business; e). There is well spelt-out sharing profit formula.
Disadvantages:
Partnership has a contractual basis and so it is perfectly possible for the agreement itself to provide express terms as to when that agreement can be terminated. Some disadvantages of Partnership are: a). Lack of trust between partners especially with finance and property; b). Bankruptcy or criminal liability of one partner may affect the goodwill of the partnership business; c). Partnership encourages laissez-faire attitude on partners; d). It encourages conflict of interest in quick decision making in managerial roles of Partnership; e). Death of one partner may affect the fortune of the business; f). Partners may incur personal liability which may affect other partners jointly and severally. See the case of Atagbua & Company v. Gura Nigeria Limited unreported Supreme Court case in Suit No: S.C. 295/2000 delivered on 11th day of February, 2005.
Grounds upon which a Partnership can be dissolved:
Partnership can be terminated in three major ways viz:
- Automation dissolution: A partnership is dissolved by the occurrence of any event that makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership. See section 33 of Partnership Law of Lagos State CAP. P1, 2015.
- Dissolution by death, bankruptcy or charge: Every partnership is dissolved as regards all the persons by the death or bankruptcy or if any partner suffers his or her share of the partnership property to be charged under the law for his or her separate debt. See section 32 of Partnership Law of Lagos State CAP. P1, 2015.
- Dissolution by the Court: On application by a partner to the court, by summons or in such manner as may be prescribed by rules of court, the court may decree a dissolution of the partnership in any of the following cases –b). when a partner is permanently incapable of performing his or her part of the partnership agreement;d). when a partner willfully or persistently commits a breach of the partnership agreement;f). when in the opinion of the court, it is just and equitable that the partnership be dissolved. See section 34 of Partnership Law of Lagos State, CAP. P1, 2015.
- e). when the business can only be carried on at a loss; and
- c). when a partner’s action is calculated to affect prejudicially the carrying on of the business or against the nature of the business;
- a). when a partner is adjudged to be insane or to be of permanently unsound mind;
Winding up of Partnership:
The effect of a full dissolution is to finish the partnership as a going concern. A partnership may be wound as an unregistered company without bringing a concurrent petition against any partner.
Conclusion:
Partners are by definition self-employed. A partnership requires the involvement of two or more persons in the business. Partnerships remain more flexible as a vehicle for owner-managed businesses and are also used by professionals such as lawyers and accountants as these professions are far happy with partnership ideal of mutual trust and management, thus incorporation is not a popular option for them.
For more information on this article please contact:
Kingsley Ezenwa Izimah, Esq.
+234 (0) 806-809-5282
Kingsley.izimah@gmail.com
