Simon's Obligations for Partnership Debt

  • 04 Pages
  • Published On: 20-10-2023

Question One

(a) Partnership law envisages two kinds of liability: joint liability and several liability. Several liability is not applicable to debts incurred by the partnership in which case only joint liability is provided. This joint liability is applicable to all debts incurred by the partnership during the time a retired partner was also a part of the firm. In other words, a retired partner is not absolved from his liability for debts of the partnership on retirement. As per the Partnership Act 1980, Section 9, a partner is jointly liable for all debts and obligations of the firm incurred while he is a partner. Furthermore, Section 17 (2) provides that retiring partners do not cease to be liable for partnership debts or obligations incurred before retirement. Reading these two together, we can see that Simon is liable for the debt of the partnership to Bennetts Electronics, which is a supplier of Sibert. This is a liability that is imposed on Simon by virtue of being a partner at the time when the debt was incurred. The only way Simon could have protected himself from this liability was if he had entered into a novation agreement with Bennetts Electronics, and the new partner, excluding himself from the liability (as per the provisions of Section 36(1) of the Partnership Act 1890); or if Bennetts Electronics had agreed to release Simon from liability. In this case, these events have not taken place and therefore, Simon is liable for the debt of the partnership. The question is how far is he liable, or that what is the extent of his liability. Simon cannot be made liable for the whole of the debt to Bennetts Electronics as his liability is joint with Robert for the purpose of this debt. Where the liability is joint, as under Section 9 (for debts and obligations of the firm at the time of partnership), there the creditor has a single cause of action against all the members of the partnership (Kendall v Hamilton). In this situation, although Simon is liable for the debt, his liability is joined with Robert and there is a single cause of action for Bennetts Electronics. In this case, Document A shows that the letter is addressed only to Simon and the demand for the payment is for the full payment to be made within 7 days of receipt of letter. Simon can challenge this demand. The full payment is for £42,300, which is demanded solely from Simon. Although Simon is liable for the payment, his liability is to the extent of half of that amount as this is joint liability. Simon cannot be liable for the full amount and he can demand Robert to also pay his share of the debt.

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(b) Simon has to take further steps for protecting his interest in the future. As of now, all Simon has done is request Robert to remove his (Simon’s) name from all business stationery and from the business website. However, this is not adequate to prevent any further liability in relation to Sibert’s future debts. Section 36(1) of the Partnership Act 1890 provides that if the creditor does not have notice of the retirement of the outgoing partner, then the retired partner is liable for debts incurred after his retirement as apparent partner. A partner leaving the partnership is required to give notice of their retirement from the firm otherwise they can still be liable for future debts of the partnership even after they leave. The notice has to be issued to all persons dealing with the partnership when the partner retires. Apart from this notice, the outgoing partner is also required to place an advertisement in the Gazette informing all who have done business or are in business with the partnership of the fact that the partner is leaving the partnership and will no longer be liable for the debts of the partnership after the stated date. The purpose of making these notices is to make sure that the future creditors of the partnership are aware of the fact of retirement of the outgoing partner. In absence of such notice, the creditor may be unaware this and will be able to take action against the retired partner for future debts. Therefore, in order to safeguard his against being made liable for future debts of the partnership, Simon has to make sure that he has given proper notice and also issued an advertisement in the Gazette. Simon can also safeguard himself from future liability by entering into a novation agreement. A novation agreement is entered into between the creditor of the firm, the retiring partner and the new partner as per which it is agreed that the creditor releases the retiring partner from their liability and the incoming partner takes on the liability. Partnership Act 1890, Section 17 (3) allows retiring partner to be discharged from existing liabilities by an agreement to that effect between himself and the members of the firm as newly constituted and the creditors. This is relevant to any existing creditors of the partnership and is not relevant to future creditors.

(c) Any financial services firm carrying on regulated activities, firm offering loans, or other consumer credit is required to be authorised by the Financial Conduct Authority. Advice on investment matters can be provided only by firms that are authorised by the Financial Conduct Authority. Firms that are so authorised can provide recommendations on investment matters based on the specific circumstances and financial objectives of the person asking for this advice. In this context, advice or recommendation is distinguished from guidance. Guidance does not include making recommendations on how one should invest, but merely gives information as to kinds of investments or principles of investments. In this situation, what Simon is asking for is advice because he is considering investing in land for development purposes and is asking whether this is a good choice for him. The answer to this question would be an advice on whether Simon should invest in land or not. While guidance can be given by anybody, advice can only be given by firms authorised by the Financial Conduct Authority. Therefore, we would have to refuse such advice to Simon and instead ask him to speak to a firm that is authorised by the Financial Conduct Authority. The purpose is that advisers are responsible and liable for the accuracy, quality and suitability of their advice for which the client can have access to the Financial Ombudsman Service. This is possible only for those firms that are authorised by the Financial Conduct Authority. If we give advice to Simon, he will not have this protection. Therefore, our response will be that we are not authorised to give him advice related to the matter of investment in land.

Question Two

The following procedures are to be followed for the decisions proposed to be taken.

The purchase of a new Heissenkoch 123 Oven for £105,000:

This decision can be taken by the directors as per the Article 3 of the Model Articles of Association as it is a decision related to the management of the company’s business. For the purpose of taking this decision, the board meeting is to be called. Notice of the meeting is to be given to the directors. This notice will contain date, time, and place of the meeting. Decision to purchase can be taken if the majority of the directors agree to make the purchase. The decision taken should be recorded and the record of the decision should be kept for a minimum of 10 years (Article 15).

The entry into an unsecured loan of £100,000 from Flytrap Plant Finance Limited to finance the purchase of the oven:

Article 3 of the Model Articles of Association provides that directors are responsible for the management of the company’s business. With regard to the decision for taking an unsecured loan of £100,000 from Flytrap Plant Finance Limited, this decision can be taken by a resolution in the directors’ meeting by the majority of the directors (Article 7). The procedure for the same would be as follows. A director’s meeting is to be called by giving notice of the meeting to the directors indicating the proposed date, time, and place where the meeting is to be held. A minimum of 2 directors are required to make the quorum of this meeting. Decision can only be taken if the quorum is achieved. Decision to take the loan can be taken by the majority of the directors at this meeting as Article 8 is not applicable and unanimous decision is not required. Special resolution is not required because net borrowing is not exceeding two times Net Worth by borrowing £100,000. Therefore, a simple majority is required. In case there is a tie in the votes, then a casting vote by the chairperson can decide the matter. Once the decision is taken it should be recorded and the record of the decision should be kept for a minimum of 10 years (Article 15).

The appointment of Dilip Sharma to the board of directors as a non-executive director as soon as possible:

Article 17 of the Model Articles of Association is applicable here. It provides for the appointment of new directors by ordinary resolution, or by a decision of the directors. In this case, the decision can be taken either at a general meeting with ordinary resolution or in the directors meeting. In case the decision is taken in the directors meeting, then the procedure to be followed is the same as outlined above as per which the meeting is to be called, notice given, quorum maintained and decision taken by the majority of the directors. In case the decision is taken in the general shareholders meeting, then the shareholders take the decision by ordinary resolution. An appointment of new directors in the company is to be notified to the Companies House on form AP01. Apart from that, the company's register of directors should be updated to show the details of Dilip Sharma once he is appointed as the director.

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Andrew is opposed to the appointment of Dilip Sharma as non-executive director and Sharad Kapoor is not able to attend the meeting. As per the Articles of Association of SBL Bakery Limited, the Model Articles are applicable except when they modified or excluded or are inconsistent with the Articles of Association. Model Article 8 does not apply to the company. Article 8 relates to unanimous decisions of the company and requires decisions to be taken by all all eligible directors with a common view on a matter. For this purpose, quorum is also required. However, as this Article 8 is not applicable to this company, it is not necessary that decisions be taken unanimously. Consequently, what is applicable here is Article 7 of the Model Articles. Article 7 requires that decisions in the directors meetings have to be taken collectively. This means that decisions should be taken by a majority. The quorum of the meetings (as per Article 11) is two directors. In this case, this quorum is achieved as both Jessica and Andrew are present at the meeting. Therefore, decision to appoint Dilip as non-executive director can be taken in the meeting. In this case, there is a tie between Jessica and Andrew because Jessica is in favour of appointing Dilip and Andrew is opposed to it. What is applicable here is Article 13 of the Model Articles of Association. This provides that in case of the numbers of votes for and against a proposal are equal, then a casting vote can be used to decide the matter by the chairman of the meeting. Jessica is the chairperson of the Board of Directors and therefore, she has the casting vote. Jessica can use this vote to appoint Dilip as the non-executive director and Andrew cannot prevent this. Therefore, the decision to appoint Dilip can be taken even in the absence of Sharad and with the casting vote of Jessica.


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