By Cynthia Mbugua LLB (Hons)
General obligations of partners
Partners have obligations under the act or common law
1. Obligation
of good faith…owed to each other and to the partnership. Act in the best
interest of each other and the firm such as don’t take actions that are likely
to injure other partners or the partnership at large.
2. Every
partner owes a duty to apply the skill, expertise and time to the business of
the partnership.A partner should not be absent without cause.
3. Duty of
disclosure. Partners have a duty of disclosure to the firm and each other on
any material information that will affect the business of the firm. There
should be full and accurate disclosure made as soon as possible within
reasonable time. A partner must always disclose all businesses and benefits
whatsoever because if partners don’t have a strict obligation then the duty to
act in the best interests of the firm will not be maintained.
4. Duty to
act within powers. The partnership agreement or resolution of partners sets the
extent of partners powers.
5. Duty to
promote the business of the partnership. Every partner must take all reasonable
action to promote the success of the partnership. You should go out of your way.
No secret profits.
6. Duty to
account for any receipts or any revenue received on behalf of the firm as well
as any expenditure incurred using the firms resources.
30th March 2017
Partnership agreement
Section 28…
1. unless
otherwise specified in the pa, all partners are to share equally in the profits
and capital of the business. Liability is equal to the capital and to the
profits unless partners have specified in the PA.
2. UNLESS
specified in the PA, every partner is entitled to be indemnified or reimbursed
on any liability incurred in the ordinary course of business of the firm.
3. No
partner is entitled to remuneration in the business of the partnership unless
clearly stated.
4. Partners
are not required to contribute any advance over and above, over and above the
contribution in capital. If they do, they are allowed interest of 6%p.a.
5. Every
partner is entitled to participate in management of the business of the partnership.
6. Unless
specified in the PA, No person shall be made a partner unless there is consent
by all existing partners.
7. There
shall be no change in the business of the partnership unless with the consent
of all the partners is obtained.
8. The
books of accounts shall be kept at the place of business of the partnership and
all partners shall have unfettered access to them.
LIABILITY
The general rule is that every single partner can bind the other
partners and the firm unless the third party whom they are contracting gets
notice that the partner does not have the powers.
Qualifications of the general rule are:
I.
The partner must be acting in the ordinary
course of business of the partnership.
II.
The third party must have no notice of the
lack of authority by the particular partner. Notice will be determined through
past conduct(how have the parties have been carrying out business with
partners), if third party has been expressly notified and thirdly, what would a
reasonable person do.
MINOR PARTNERS
Under Kenyan Law, Partnerships are formed by contracts. This
therefore means that partnerships are governed by the conditions of a validity
of a contract. Therefore a minor has no capacity to join a partnership. Under
the Partnership Act, minors are allowed to have a share on the capital and
profits of a partnership. For example in cases where the minor is an heir.
Before a minor reaches age of majority, he is not entitled to engage in the
business of a partnership. Although a minor is entitled to share of capital, he
is not liable to any losses or any liability incurred by the partnership when
he is still a minor. On attaining the age of majority, a minor can choose
either to become a full partner meaning he becomes liable for any liability
incurred from the time he joined the partnership or choose not to become a
partner or become a full partner and choose to only accept liability from when
he became a full partner at the age of majority.
PARTNERSHIP PROPERTY
This is:
I.
Property brought into the partnership.
II.
Property acquired in the course of the
business of the partnership
III.
Any property acquired for the business or
the purposes of the partnership
IV.
Any property acquired by or on behalf of the
partnership
3. The registration has the partnership required that the
partnership be coregistered in its nmae
4. Conditions as to usage
DISSOLUTION OF PARTNERSHIPS
1. BY
NOTICE
2. By
operation of the law
Under the following circumstances:
i.
Bankruptcy by any of the partners
ii.
Mentally unsound or physically incapable of
carrying out business
iii.
If it is physically impossible to continue
with the business.
3. By the
Court
The court can dissolve a partnership on application by a partner:
A. If
adjudged a lunatic, permanently of unsound mind, incapble of being engaged in
the firm buisiness
B. When a
partner becomes permanently incapable of performing his part of the partnership
agreement
C. Serious
breach of PA
D. If a
partner carries himself in a manner that makes it impossible for him to
continue to be in partnership with the rest
E. When
the business of the partnership can be carried on at a loss
F. When in
the opinion of the court, there are circumstances that make it just and
equitable that the partnership be dissolved
4. By end
of term
5. By
agreement by the parties
Commercial
Transactions 5
April 2017
LIMITED
LIABILITY PARTNERSHIPS
In
Kenya LLPS are governed by the LLPs Act and the Partnerships Act
Under
section 8 LLP Act, where the provisions of the Partnership Act and LLP Act
affect as regards the governance of LLPs, the provisions of lLP Act prevail.
Nature
of LLPs
A.
An
LLP is a body corporate with all powers that a body corporate has.
B.
Is a separate and distinct legal person from
its partners. Consequences to this are:
·
Unless
expressly provided, obligations of the partners in an LLP do not bind the LLP
to other partners. Any obligation entered to by an individual partner does not
bind the partnership.
·
Death,
bankruptcy or capacity of an individual partner does not dissolve the
partnership
C.
Unless
expressly provided liability of partners is limited to their capital
contribution.
D.
LLPs
have a life of term independent of their members. They have perpetual
succession unless expressly provided for in the agreement. Chief consequence is
that capital in an LLP can be transferred or assigned. The capital unlike an
ordinary partnership can shift from one person to another.
LLPS
are common in professions such as Private equity firms[1],
big law firms, professional large audit firms, specialized proffessional firms
such as architects.
Comparative
advantages of an LLP
1.
Tax
efficiency. This is where you pay to Caesar only what belongs to Caesar…no more
no less. LLPs have a tax pass through structure. LLPs are permitted by law to
distribute their net earnings before tax to their individual partners therefore
providing substantial income tax savings . Not double taxed as done in
companies.
2.
Limitation
on liability of individual partners. Partners are not liable on the obligations
that have been entered into by other partners. They are only liable to the
extent of their capital contribution. This is useful in that it enables one to
know how much they want to put in the LLP in terms of capital…depending on the
risk. It also enables perpetuity of the LLP. It also helps a lot in fundraising
from a wide source because of the liability of individual partners therefore
you don’t have to worry about what the other partners will do. Ensures the
business is shielded from personal problems of the partners.
3.
LLPs
are relatively stable in that the death or bankruptcy of physical capacity of
an individual partner does not affect the LLP. This ensures confidence among
partners, employees and other stake holders
4.
It
has expeditious and simple decision making process. This is because a manager
can either be one of the partners so long as they have the expertise. All
management roles unless otherwise specified are vested on the manager. The
manager has the full mandate of taking positions on behalf of the partners. The
management committee has the power to supervise the manager. The decisions are
decided by the manager or management committee. Therefore no corporate approval
processes as in a company. General partnerships however require decisions to be
approved by a majority of partners.
5.
Less
disclosure requirements and confidentiality in the conduct of the business. An
LLP does not have to publish the financial report, annual statement, returns.
They are confidential.
Registration
of LLPs
An
LLP can be created by agreement, whether express or implied.
Unlike
ordinary partnerships, an LLP must be registered under the Act for it to come
into existence.
An
LLP comes into existence only when a certificate of registration is issued.
Administratively, the Registrar of companies can act as the Registrar of
Partnerships.
Process
of registration is:
I.
Application
of reservation of name. Pay the prescribed fee and apply to the Registrar for
reservation.
II.
Once
Registrar has confirmed, the applicants shall file the statement of particulars
containing:
a. Name of LLP
b. Business of LLP
c. Particulars of partners ie name ID,
Residence,
d. Particulars of manager
e. Proposed residence of LLP.
III.
Statement
of particulars may be accompanied by other documents that the Registrar may
require. Eg evidence of source of capital.
IV.
If
all requirements are met, the LLP may be registered at a requested fee.
V.
Upon
registration, the Registrar will issue a certificate of registration and enter
the serial number in the LLPs register.
NB:
Capital statement is not a necessity in the statement of particulars
Management
and Control of LLPs
Ordinarily,
the government structure of an LLP is provided for in the LLP agreement. Where
there is no agreement, the provisions in the first schedule will apply. The LLP
agreement is a tripartite agreement. Is made between the partners to each other
and the partners to the LLP. The LLP is a party to the LLP agreement. The LLP
here is a separate legal person.
Some
of the essential features of an LLP agreement are:
Title
page- This is a limited liability partnership agreement with respect to…….XYZ
Limited Liability Partnership…..
Parties
clause. Should include all partners and the name of the LLP as well.
Name
of the Partnership
Business
of the Partnership
Commencement-
When it starts. Doesn’t have to be the date of incorporation.
Partners.
Provide the qualification of the partner., the admission procedure and how can
one cease to be a member.Obligations and duties of the partners, Rights of the
partners
Manager.
Qualifications, procedure of appointment, duties and powers of a manager.
Accounts
and records
Auditors
Capital
contribution
Distribution
of profits
Reserve
matters
Transfer
and assignment of capital. Pre-emption rights of partners
Governing
or dispute resolution
General
clauses
PS:
Look at Section 28 of Partnerships act on remuneration of partners.
If
the partners do not have an LLP agreement or where the LLP agreement does not
provide otherwise, all members of the LLP should share the capital and any
profits of the partnership equally.
An
LLP shall indemnify each partner in respect of payment made and personal
liabilities incurred in the ordinary and proper business of the LLP or if that
liability has been incurred in order to preserve the business or property of
the LLP.
Unless
provided otherwise in the LLP agreement, eah partner should participate in the
management of the partnership. Should not however take the role of manager.
They can take the role of the management committee only.
Unless
otherwise provided, a person can only become a partner in the LLP with the
consent of all existing partners.
Decisions
will be taken by majority.
Each
partner shall have one vote.
Every
partner will have a duty to provide information and to account…….
Every
partner will have a duty to account with the partners any benefit derived by
the partner for any use by that partner for the name, business or use by the
LLP
Partner
can only be expelled by majority of other partners
Benefits
of Provisions of the Act
1.
Fill
gaps in the absence of llp
Difference
between ordianry partnership and LLP
Change
in the partners of an LLP does not affect the existence of the nature of an
LLP. Is independent of its members.
An
LLP is required to have a manager. Members of an ordinary partnership have tp
agree to appoint one
An
LLP has obligations to file with the registrar an annual solvency statement. AN
ordinary partnership doesn’t have that obligation=
An
LLP partner does not bind the other partners or partnership unless the LLP
agreement provides or through resolution by the partners. AN ORDINARY
Partnership, the partner binds other partners in his activities
Capital
in an LLP can be transferred or assigned by a partner. Capital in an ordinary
partnership cannot be transferred as transfer, resignation dissolves a partnership.
An
LLP partner may resign by notice of not less than 90 days. Partner in an
ordinary partnership doesn’t resign as it leads to dissolution of the
partnership.
Similarities
1.
Whether
ordinary or LLP, minimum number of partners is 2.
2.
Unless
expressly provided in the Partnership agreement, or LLP agreement in both
partnerships, partner acts as an agent of the partnership
3.
The
provisions as to property is similar. Brought in property, acquired in the
course of business, acquired for the business of the property, bought for the
company.
Conversion
of other forms of business to LLP
Two
types of businesses can be converted ie. GP and Private Limited liability
Company
A)
Conversion
of GP to LLP
GP
can be converted into an LLP once the following conditions are met:
i.
Partners
agree through resolution. Resolution must be by all partners
ii.
All
partners in existing GP will become partners in the LLP
There
is no existing encumbrance on the property that prevents assets or business of
the partnership to be transferred into the business of an LLP
PROCESS
A
GP will convert into an LLP in accordance to the Second Schedule.
GP
files a statement for conversion to the Registrar first. The statement
contains:
i.
Name
of Partnership to be converted
ii.
Registration
number and registration date of the Partnership’
iii.
Proposed
name of the new LLP
iv.
Business
of the proposed LLP
v.
Proposed
name and particulars of the manager of the LLP
vi.
The
particulars of the partners ie name, ID, Address, initial place of residence or
registered office in the case of a body corporate.
If
the Registrar of the LLP is satisfied that the GP has fulfilled the conditions
under the 2nd schedule, he shall register the gP as an LLP and issue
the new LLP a certificate of registration. Upon registration, the GP shall be
cancelled in the register of business names and the partners shall be removed
as well. All assets and property shall be transferred and assumed by the LLP.
All obligations under a contract shall be assumed by the LLP or partners under
the GP shall become partners under the llp. All liabilities shall be taken by
the LLP. AnY proceedings assumed by the GP shall be taken up by the LLP
B)
Conversion
of Private Limited Liability Company
PLLC
conditions:
i.
Must
be a company limited by shares. Only a private company limited by shares can
convert to an LLP
ii.
Can
only convert if there is a special resolution by members that authorizes
conversion
iii.
All
the existing shareholders of the LLC must agree to convert and become
members/partners in the LLP.
iv.
There
must not be any existing encumbrance on the property of the LLC that will
prevent it from being transferred to an LLP
PROCESS
Shall
be governed by the 3rd schedule LLP aCT
Llc
files a statement of particulars first which contains:
i.
Name
ii.
Statement
of incorporation
iii.
Registered
office and adress of the LLC
iv.
Proposed
name of LLP
v.
Proposed
business of LLP
vi.
Proposed
registered office and place of business of the LLP
vii.
Particulars
of the partners formerly shareholders of the LLP
viii.
Statement
confirming the assets or liabilities of the company shall be transferred to the
LLP
Once
Registrar confirms that the LLC has satisfied the conditions of being
converted. He shall register the LLP and issue a certificate of registration.
On the date the LLP is registered, the LLC shall be cancelled in the register
of companies and all assets, liabilities, obligations under contract shall be
transferred to the LLP.
Management
And Control Of The Llp
Every
LLP is required by the act to have at least one manager.
At
least one of the managers should be a natural person.
Where
the manager is appointed on the application of registration, the statement of
particulars applying for registration of LLP must contain the particulars of
the manager. Any subsequent appointment of the manager can only be done by
filing a statement providing the change and must be filed by the registrar
within 15 days
A
manager can be a partner but need not be a partner engaging in business
A
manager must have the expertise needed to manage the business. The registrar
may require a partnership to replace a manager or refuse to register a
partnership where the manager does not have the qualifications, expertise to
manage the business.
Role
1.
Take
control and manage the business of a partnership.
2.
A
manager will be required to prepare and key all the books of accounts and
records and any other documents of the partnership in such place and in such
manner the partnership agreement or partners through special resolution or the
Act may direct.
3.
Every
year, the manager or managers are required to prepare a solvency statement and
file the statement with the Registrar. This is. Statement stating in the
reasonable opinion of the managers, the business is solvent or is insolvent.
Insolvency means that the business cannot be able to pay its debts when required.
Should be filed within 15 months after registration of LLP and two times
subsequently in a calendar year provided no period of more than 15 months shall
elapse between each statement. It will be an offense if each manager does not
file
4.
Make
available the books of accounts to the partners for inspection.
5.
To
file any change in the particulars of the partners or in the LLP within 15
days. This includes resignation of the partners, transfer or assignment, change
of the business of the partnership, change in the place of business. It is an
offense failure to file the change in particulars as required.
Terms and Conditions
The
manager is appointed as per the resolution by partners. A manager can be
terminated through:
I.
Resignation
II.
Death
or become incapacitated
III.
By
resolution of simple majority.
IV.
By
petition or application by any partner on misconduct
V.
If
a manager has been appointed for a fixed term and his/her term expires.
A
Manager is entitled to remuneration for his role. They are also entitled to
compensation when removed from office even when they remain as a partner.
Remuneration is fixed by an agreement made by the partners. A manager cannot
fix his own remuneration even if he owns majority of the capital of a
partnership.
During
the transition period, the partnership is still required to have a manager but
the partners through resolution may decide to appoint one of the partners as a
temporary manager. When acting as a temporary manager, he/she still has the
full powers and responsibilities of a full manager.
Winding up of LLPs
LLPs
can only be dissolved and wound up in accordance to the Act. Process of winding
up is provided for under the 4th Schedule of the LLP Act and
Insolvency Act. Where the 2 arent harmonized and there is an inconsistency,
provisions of the Insolvency Act will prevail.
An
LLP is dissolved or wound up:
- When the term expires
- Where business of the LLP is
illegal
- Where LLP is insolvent and can’t
pay its debts
- Where LLP has been registered for
illegal or improper stuff
- In the public interest as decided
by the AG eg if it is against public policy.
- When it is not possible to carry on
business of LLP other than continuous loss
- When there is just and equitable
reasons
Under
the Act, LLP is dissolved when the Registrar or court appoints a receiver
manager.
A
receiver manager doesn’t become partner but conducts business of collecting,
realizing and distributing the assets of the LLP to the benefit of its
creditors and in the case of surplus to the LLP partners.
An
LLP as a body corporate can either come into being by express or implied
agreement provided the agreement is for a joint business.
LLP
has………...:
i.
Apply
for and register an LLP\
ii.
Convert
LLC
to LLP
GP
to LLP
iii.
Draw
up Partnership Agreement
iv.
File
a statement of change of particulars of LLP
NB:
All you need is a special resolution to convert LLC to LLP but all shareholders
must be partners. An LLC can retain its name after:
- Doing a search
- Keeping the name but removing ‘LLC’
at the end and putting ‘LLP’
Partnerships
don’t have shares. They have capital
There
is no maximum number of partners in an LLP
[1]
These are firms which pull capital and financial resources for the purposes of
acquiring equity in public and private companies improving their performance by
disposing them off or exiting at a profit. Uses the capital to invest through
equity or help the company to exit as they get a profit
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