PARTNERSHIPS LAW NOTES

  PARTNERSHIPS

 

·       Kenyan law recognises 3 forms of partnerships: general partnerships; limited partnerships (LP); and limited liability partnerships (LLP)

·       Section 3, Partnership Act 2012 (‘PA 2012’) defines partnership as the relation which exists between persons carrying on a business in common with a view to profit

·       General Partnerships are governed by the PA 2012:

o   Many general partnerships (or ordinary partnerships, as they are sometimes known) arise without the knowledge of the persons involved; it is a matter of fact whether a general partnership exists and the parties cannot simply determine this for themselves

o   Normally, the general partnership relationship is governed by a contractual document/agreement, but the essence of a partnership is the continuing relationship, personal as well as commercial, with the contractual agreement being only an indication of the relationship (Hurst v Byrk [2001])

o   When the courts have to consider whether a general partnership exists, they look at the substance of the arrangements and not the stated intentions of the parties

o   One advantage of a general partnership over LPs and LLPs is that they are simple and cheap to set up; no formal agreement is necessary as the terms of the PA 2012 will apply in default of agreement

o   Nevertheless, it is advisable for the partners to formalise arrangements by entering into a private partnership agreement

·       Kenyan Limited Partnerships are also registered under the PA 2012:

o   Section 2, PA 2012: a LP must be formed between two or more persons and carry on a business in common with a view of profit

o   In form, an LP broadly resembles a general partnership, except that an LP has two categories of partner:

i.            General partners – they have the responsibility for managing the LP’s business and have unlimited liability for the firm’s debts and obligations; and

ii.            Limited partners – who invest capital in the LP, but do not take an active role in the LP’s operation and

have limited liability up to the amount of capital that they have contributed

o   LPs are governed by a relatively light regulatory and statutory regime as compared to companies

o   This flexibility afforded to LPs means that they may vary in size and nature from two-person LPs to larger LPs with more complex structures (they are often used as vehicles for venture capital funds)

·       Limited Liability Partnerships are incorporated under the Limited Liability Partnerships Act 2011 (‘LLPA 2011’)

o   An LLP is a body corporate with a legal personality separate from that of its members

o   The limited liability status of LLP members makes an LLP a popular choice for many professional partnerships

o   However, in return for such limit on liability, the accounts of the LLP are public and there is the administrative and cost burden of regularly filing returns and forms with the Registrar of Companies

 

FEATURE	GENERAL PARTNERSHIP	LIMITED PARTNERSHIP	LIMITED LIABILITY PARTNERSHIP
PARTIES	Partners	General Partners: responsible for managing the LPs business and have unlimited liability for the firm’s debts and obligations Limited partners: who invest capital in the LP, but do not take an active role in the LPs operation, and have limited lability up to the amount of capital they have contributed	Members à An LLP must have at least two designated members who have particular                               administrative responsibilities and function within the LLP
GOVERNING LEGISLATION	Partnership Act 2012		Limited Liability Partnership Act 2011 à Partnership law applies to an LLP except as specifically provided in the LLPA 2011

 

SEPARATE LEGAL PERSONALITY	No – E.g. when a general partnership or legal partnership owns a building, then the building is owned by the partners and held in trust for the partnership (i.e. the title deed will have the name of the partners)		Yes à An LLP is a body corporate and a legal entity separate from its members (S. 6, LLPA 2011). It has unlimited capacity and can do anything that a legal person can do (S. 6(3), LLPA 2011)
FORMATION	No registration required à	Yes, registration is required à	Yes à
FORMALITIES	A general partnership can come	An LP must be registered at the	An LLP is incorporated by filing an
AND	into existence without formalities.	Registrar of Companies by filing an	electronic application through e-
REGISTRATION	It is a question of fact whether or	application for registration of   a	Citizen for the incorporation of an
	not a general partnership exists.	limited partnership (S. 68 – 70 PA	LLP and paying the required fee to
		2012). The LP comes into existence	the Registrar of Companies.
		on the date of the Certificate of	The LLP is created when the
		Registration	Registrar of companies issues a
			Certificate of Incorporation
LIMITED	No à	Yes à	Yes à
LIABILITY     FOR	Partners are jointly liable for debts	For limited partners only.	The LLP members act as agents of
PARTNERS/	and obligations of the general	A limited partner’s liability is limited	the LLP and, in general, are only
MEMBERS	partnership business (S. 7, PA	to the   amount   of their agreed	liable up to the amount they have
	2012).	contribution. Limited partners are	contributed to the LLP.
	Partners are   also   jointly   and	not liable for debts or obligations in	However,     there                     are                     some
	severally liable for the wrongful	excess of this amount, provided	exceptions – S. 10, LLPA 2011.
	acts or omissions of their fellow	they do   not   take   part   in   the
	partners in the ordinary course of	management of the LP (S. 4(2)(b),
	the partnership business or with	PA 2012).
	the authority of other partners (S.	General partners have unlimited
	21, PA 2012).	liability (S. 4(2)(a), PA 2012).
MINIMUM AND MAXIMUM NUMBER                     OF PARTNERS/ MEMBERS	Minimum number: 2     No upper limited.	Minimum                    number:                1                    general partner and 1 limited partner   No upper limit.	Minimum number: 2 members, who must be designates members   No upper limit.
	Partners can be companies.	Partners can be companies
			Members can be companies
FILING REQUIREMENTS	None	Certain changes to the LP and the partners, their liability and the sums contributed have to be registered	Annual accounts, confirmation statement, changes to member\s details and status, changes to registered office and place of inspection of records, details of mortgages and charges, all have to be registered
ACCOUNTING REQUIREMENTS	No formal requirements other than S. 16 PA, 2012 – ‘Accounting and Partnership Records’   (1) Every partner shall have the responsibility to ensure that –   a.   Accounting records of transactions affecting the partnership in which he is involved are properly kept; and b.   The record are, on request, made available to the partnership or to any partner.		Section 29, LLPA 2011: LLPS must lodge annual declarations of solvency or insolvency with the Registrar.   (1) A limited liability partnership shall lodge with the Registrar a declaration by one of its managers that in the opinion

 

	(2) Any partner shall have the duty to cooperate with the person keeping records of the partnership or drawing up the accounts of the partnership on behalf of the partnership		of the manager, the partnership either –   a.    Appears, as at that date, to be solvent; or b.    Does not appear, as at that date, to be solvent (2) The declaration shall be lodged not later than fifteen months after the registration of the LLP and subsequently once every calendar year at intervals of not more than 15 months   Section 30, LLPA 2011: Limited Liability partnerships are to keep proper accounting records.   (1) An LLP shall keep such accounting and other records as will –   a.     Sufficiently explain the transactions and the financial position of the partnership; and b.     Enable a profit and loss account and a balance sheet to be prepared, from time to time that gives a true and fair view of the state of affairs of the partnership
INTERNAL REGULATION	Governed by private partnership agreement with default rules in PA 2012 applying in absence of a specific agreement.   There are no constitutional documents.		Governed by private LLP agreement with default rules in LLPA 2011 applying in absence of specific agreement.   No constitutional documents.
DUTY OF GOOD FAITH BETWEEN MEMBERS	Yes		No à Unless provided for in the LLP agreement
EXECUTION OF DOCUMENTS	SIMPLE CONTRACTS
	A partnership has no legal personality and contracts with third parties through one or more of its partners, or other duly authorised agent. The formalities for executing a written contract that    is    intended    to    bind    a partnership depend on the legal	A limited partnership has no legal personality and so will usually contract with third parties through its general partner(s). each general partner’s capacity to contract depends on the nature of its own legal personality.	A simple contract with an LLP can be made in either of the following ways:   i. By the LLP itself, in writing and under its common seal (S. 7(2) LLPA 2011); or

 

	personality of the person executing the contract for the partnership.		ii. On behalf of the LLP by anu person acting under its authority, whether express or implied (S. 43(1)(b), CA 2006, as modified)
	DEEDS
	An individual partner does not have authority to execute a deed on behalf of a partnership unless he or she has been expressly authorised to do so by a deed (Berkeley v Hardy [1826]).   Deeds should be executed by all the parties in a partnership unless one partner has been given the requisite authority by deed, e.g. through a power of attorney, to execute the deed on behalf of all the partners.   Where a deed is executed by a partner on behalf of the partnership:   ·       The form of execution will depend on the legal personality of the executing partner; ·       The instrument should make it clear that: the deed is made in the firm’s name; the obligations in the deed are undertaken by the partner’s as a whole (not just the executing partner); and, the person executing the deed does do as an agent of the firm (S. 20, PA 2012)	The general partner must be given express authority, conferred by deed, to execute the proposed deed on the LP’s behalf.   Where a deed is executed by a general partner on behalf of a Limited Partnership:   ·       The form of execution will depend on the legal personality of the executing partner; ·       The instrument should make it clear that: the deed is made in the firm’s name; the obligations in the deed are undertaken by the partner’s as a whole (not just the executing partner); and, the person executing the deed does do as an agent of the firm (S. 20, PA 2012)	An LLP may execute a deed by:   ·       Affixing the   LLP’s   common seal (if it has one); ·       Signature on behalf of the LLP, either: two members of the LLP, or, a single member of the LLP in the presence of a witness who attests the member’s signature   Whether the member executing a document on an LLP’s behalf is itself a body corporate, it must act through the agency of a duly authorised natural person (CA 2015).
HOLDING ASSETS	A general partnership does not have a separate legal personality so it cannot own assets in its own name. Assets are normally held in the name of individual partners who hold the assets as trustees for the partnership.	An LP does not have separate legal personality so it cannot hold assets in its own name. Assets are usually held either:   ·       On trust by one or more nominee (often the general partners); or ·       By all the partners	An LLP can hold assets in its own name.

 

TAX TRANSPARENCY	Yes
CESSATION OF PARTNERSHIP		Dissolution of an LP occurs when the partnership relationship terminates. Dissolution can be brought about by:   i.            Expiration of a fixed term or the end of the venture for which the LP was established; ii.            Illegality; iii.            Any limited or general partner may make an application to the court for dissolution of the LP on grounds of: another partner’s permanent incapacity; conduct by a partner calculated to prejudice the carrying on of the business; deliberate or persistent breach of the LP agreement by a partner; the partnership business only being carried on at a loss; or a dissolution being ‘just and equitable’.   BUT: the death or bankruptcy of a limited partner and the mental disorder of a limited partner, unless their share cannot otherwise be ascertained and realised, are not grounds for dissolution of an LP by the court.	Positive steps must be taken to terminate an LLP. It will not dissolve automatically.   The routes to termination are:   i.        Striking off by the Registrar ii.       Winding up (voluntarily or compulsorily)