Partnership Property

Partners’ Interest I

Partnership property is not directly owned by the partners. It is available primarily to satisfy partnership debts. A partner who uses partnership property for his own purposes must account to the partnership for the free use of the property.  This follows from partner’s duties and obligations of utmost good faith.

On a winding, up, partnership property must be sold and distributed in accordance with Partnership Act and Bankruptcy rules. In a sense, what the partners “own” and what they are entitled to, is their respective shares of the ultimate balance on a winding up of the partnership assets.

The partner’s interest is a “chose in action”, a right that can be asserted ultimately by legal action. They have no direct interest as such in the partnership property. The partner’s interest is his share of the net balance of his entitlement as a liquidated sum, on the actual or hypothetical dissolution and winding up.


Partners’ Interest II

The categorisation of the partner’s interest as a chose in action can have significant consequences, in other contexts. The ultimate assertion of the interest, should it prove necessary is by way of a court ordered winding up or a court order for accounts and distribution.

In practice, the assertion of the partner’s interest by court order is not usually necessary. The parties may agree to a notional winding up. A partnership agreement may create an entitlement in that regard.

Under the default rules, a partner can terminate the partnership by notice, which triggers a winding up. This contrasts with the position for companies and gives the partner considerable leverage to realise his interest.


Partnership Assets

It is important to identify what is or is not partnership property. Partnership property must be used only for the firm’s purposes. A partner who uses it in a personal capacity must account to the partnership for the benefit received.

When a firm is dissolved, partnership property must be applied if necessary, in payment of the partnership debts and liabilities. It is available in priority to the partner’s own separate assets, in meeting partnership debts.  Individual partners are entitled to the proceeds to the extent that there is a surplus.

Partnership assets are presumed to be held as tenants in common, rather than as joint tenants. It does not generally pass by way of survivorship on the death of a partner. It remains partnership property and must be dealt with as such.

Not all assets used by the partnership will necessarily be partnership property. Partners may allow their own property to be used, without releasing ownership of it to the partnership. For example, the partnership may have a right only to use or lease the property.


Introduction of Assets

Whether an asset is or is not partnership property depends on the intention of the partner who owned it, at the time the property was made available to the partnership. The partnership or other agreement may determine the position. Alternatively, there may be an express or implied agreement or intent, expressed in words or by conduct.

If an individual partner, who acts in a private capacity, provides the purchase monies, it is a matter of his intention (as later discerned by the court, if necessary) as to whether it is to be partnership property or not. In this context, as with the formation of a contract, the courts do not look at the actual subjective intention of the provider, but interpret the objective facts, as they find them.

It will often be apparent from the accounts as to whether assets have been introduced as partnership property or not. Where an asset is contributed, it should show up in the partnership account as an asset and its value should appear in the partner’s capital account. In contrast, if it does not so appear and a rent is paid, it is unlikely to be a partnership asset.

There may be significant tax consequences for partners in transferring assets to a partnership. Significant capital gains tax and stamp duty liabilities can arise. Unlike the case with incorporation, few reliefs are available.


Partnership Purchased

Property and assets may be introduced by a partner or may be subsequently acquired on behalf of the firm. Property purchased with partnership money or on behalf of the partnership is presumed to be partnership property. Although this presumption is strong (fiduciary issues arise), it may be exceptionally shown that the partners had a different intention.

Where assets are purchased secretly with partnership funds, the purchasing partner must hold them in trust for the partnership. Partners have a duty of good faith, which applies in relation to their property dealings. Property and assets obtained in the course of an unauthorised competing business may belong to the partnership by way of a constructive trust.

Where one or a number of partners purchase property in their names, they may in effect hold it in trust for the partnership. The other partners should register a caution or note to protect their interests, so as to prevent the registered partner(s) from disposing of the property, without the consent of the other partners.


Capital Maintenance

Partnership property, whether contributed or later acquired, in effect represents partnership capital. It cannot usually be taken from the partnership, into the ownership of individual partners while it continues.  It may be distributed on a winding up.

Trading profits are credited to the partner’s current account. The partner’s shares may be taken as drawings. If there are losses, drawings may not usually resume until any deficit on the partner’s current account is eliminated by new profits.

Until winding up, the partnership property although vested in the partners is a fund primarily available to meet partnership debts.  To some extent, the partners are quasi-trustees in respect of this property, which must be held as partnership property.


Distribution of Capital

A partner is not entitled to any particular item of partnership property. His ultimate entitlement is his net share of the proceeds of the partnership property, after payment of liabilities, if any, on any actual or notional winding up.

In order to be categorised as separate property outside the partnership, it must cease to be partnership property. This, in principle, requires that the partnership be wound up or that there be a technical or notional dissolution, with a reconstitution of the partnership capital. This is required, in effect, in order to verify the solvency of the partnership.

If the firm is solvent, all partners may agree to a reduction of capital and the transfer of an asset in satisfaction of his interest, to a partner. Where partnership asset is transferred to a partner, there is, in effect, a reduction of the partner’s capital.

If the firm is insolvent, the assets must be dealt with under insolvency rules. A distribution may not be possible as it may be an unlawful preference in a subsequent insolvency law.

There may be significant tax consequences for partners in assets being transferred from a partnership back to a partner in unwinding the partnership. Significant capital gains tax and stamp duty liabilities can arise.


Identifying Assets I

The mere fact that property is used by the partnership is not sufficient in itself to constitute it as partnership property. It may be owned by one partner and be used by consent by the partnership, either for payment or otherwise.

Ultimately what is and is not partnership property, turns on the partners’ agreement and intention.  It is presumed that assets acquired for the purpose of the partnership are partnership assets.  Where the property is purchased with partnership funds, it is almost inevitable that it will be deemed partnership property.

The Partnership Act provides that all property originally brought into the partnership stock or acquired or purchased on account of the firm or for the purpose or in the course of the partnership is partnership property. It must be applied for the exclusive purposes of the partnership and in accordance with the partnership agreement.


Identifying Assets II

The principles of partnership property apply to all classes of assets. Property includes all classes of assets including real property, goods and intangible assets, such as goodwill. It includes intellectual property, shares, investments as well as well as files and materials.

The manner in which the property is reflected in accounts which have been agreed and signed off over a period will be the parties’ near conclusive evidence of the status of the asset.  If parties have treated assets as partnership property over a period in the accounts, which have been accepted by the partners, it will be difficult of a partner to assert later that this is incorrect.

Certain assets may be central to the partnership’s activities.  Where the income derived from the asset is treated as partnership profits, then this will be strongly indicative of partnership property.

Where persons own land as co-owners rather than partners, and they use the profits from that land to buy more land, it is presumed to belong to them as co-owners.


Land and Buildings

One or more partners may be the sole owners or co-owners of the land and buildings (real property) used by the partnership. This real property may be used by the partnership in circumstances where it is not intended that the lands pass into the ownership of the partnership.  In this case, the partners may pay rent or otherwise account to the land owners for the use of the property.

One or more partners may hold real property which is partnership property as the legal/ registered owner (s). This is equivalent to the property being held in trust for the partnership. The fact that a property is held by partners or is held in particular legal shares does not necessarily mean that it is held by the partners in those shares are as partnership property. The partnership agreement and accounts determines the ultimate position.

It is presumed that real property which is co-owned and used for business purposes, is held by as tenants in common.  It follows that upon the death of one partner, the property passed to each owner’s successors and does not pass by survivorship to the remaining owners.  This is consistent with the principle that the property is an economic investment of the partners and should not simply be lost to other partners, by virtue of the prior death of one.

It may happen that the legal title is held by partners jointly.  However, in this case, the equitable interest in the property is  nonetheless likely to presumed to be held as tenants in common in the partnership shares, if it is partnership property.


References and Sources

 

Irish Sources

Partnership Act, 1890

Partnership Law 2000 Twomey M. Butterworths

 

UK Sources

Lindley & Banks on Partnership: (19th Revised edition) 2016  Banks, Roderick I’Anson

Partnership & Llp Law (8th edition) 2015  Morse, G.

Partnership Law (5th Revised edition) 2015  Blackett-Ord, Mark; Haren, Sarah;


Partnership Act

Partnership property.

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.

(2) Provided that the legal estate or interest in any land, or in Scotland the title to and interest in any heritable estate, which belongs to the partnership shall devolve according to the nature and tenure thereof, and the general rules of law thereto applicable, but in trust, so far as necessary, for the persons beneficially interested in the land under this section.

(3) Where co-owners of an estate or interest in any land, or in Scotland of any heritable estate, not being itself partnership property, are partners as to profits made by the use of that land or estate, and purchase other land or estate out of the profits to be used in like manner, the land or estate so purchased belongs to them, in the absence of an agreement to the contrary, not as partners, but as co-owners for the same respective estates and interests as are held by them in the land or estate first mentioned at the date of the purchase.


Property bought with partnership money.

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.


Conversion into personal estate of land held as partnership property.

22. Where land or any heritable interest therein has become partnership property, it shall, unless the contrary intention appears, be treated as between the partners (including the representatives of a deceased partner), and also as between the heirs of a deceased partner and his executors or administrators, as personal or moveable and not real or heritable estate.


Procedure against partnership property for a partner’s separate judgment debt.

23.—(1) . . . . A writ of execution shall not issue against any partnership property except on a judgment against the firm.

(2) The High Court, or a judge thereof, or the Chancery Court of the county palatine of Lancaster, or a county court, may, on the application by summons of any judgment creditor of a partner, make an order charging that partner’s interest in the partnership property and profits with payment of the amount of the judgment debt and interest thereon, and may by the same or a subsequent order appoint a receiver of that partner’s share of profits (whether already declared or accruing, and of any other money which may be coming to him in respect of the partnership, and direct all accounts and inquiries, and give all other orders and directions which might have been directed or given if the charge had been made in favour of the judgment creditor by the partner, or which the circumstances of the case may require.

(3) The other partner or partners shall be at liberty at any time to redeem the interest charged, or in case of a sale being directed, to purchase the same.

(4) This section shall apply in the case of a cost-book company as if the company were a partnership within the meaning of this Act.

(5) This section shall not apply to Scotland.


Cases

Wray v. Wray,

[1905] 2 Ch. 349, 79 L. J. Ch. 687
Real estate was deeded to William Wray. This was the firm name, under which Eliza Wray, Henry Wray, William James Wray and Joseph Turnbull carried on a partnership business, and the premises were bought with  firm funds and used in the firm business.
 Warrington, J
“I have to ascertain who was meant by the person described as William Wray in the deed; and I find on the authority of Maugham v. Sharpe, 17 C. B. (N. S.) 443, that I may instead of William Wray read the deed as a conveyance to the four partners, Eliza Wray, Henry Wray, William James Wray and Joseph Turnbull. So reading the deed and inserting the names of the partners, it becomes a conveyance to these four persons. 
The legal estate is not affected by the fact that the purchase-money was partnership property; and the beneficial interest was already vested in the four partners. I will therefore make a declaration that the legal estate passed to the plaintiffs and Henry Wray as joint tenants, and that on the death of Henry Wray it passed to and is now vested in the three continuing partners in fee simple.” 

Cowan v Wakeling 

[2008] EWCA Civ 229 
Lord Justice Rimer:
“The partnership agreement
The agreement was concerned with the proposed exploitation for the  benefit   of   the two partners of premises at the rear of 10 Cameron Road, Seven Kings, Ilford, Essex (“the property”). It was held under a 99-year lease. Immediately before 1 October 1995 it was held in the sole name of Mr Wakeling, but on that day it was transferred into the names of the two partners and their title as joint owners was registered at HM Land Registry in 1996. The property became partnership property and Mr Cowan’s position before the judge was that the two partners held it beneficially as tenants in common.
……………Before considering the merits of these arguments there is a preliminary question as to whether Mr Cowan in fact had any cause of action for the damages claim that he brought against Mr Wakeling. As I have pointed out, Mr Cowan disclaimed before the judge any suggestion that the partnership has been dissolved. In particular, he did not suggest that Mr Wakeling’s conduct amounted to a repudiation of the partnership agreement that he had accepted so as to dissolve the partnership. His position at the trial was that the partnership was a continuing one. But even if this court were able to, and could properly, conclude that the partnership was and is in fact dissolved, there was anyway a singular difficulty in the way of Mr Cowan’s breach of contract claims, all of which arose out of liabilities allegedly owed by one partner to the other arising under the partnership agreement. That difficulty is best described by the following quotation from the speech of Lord Millett, with which all their Lordships agreed, in Hurst v Bryk and others [2002] 1 AC 185, at 194.:
“Disputes between partners and the dissolution and winding up of partnerships, however, have always fallen within the jurisdiction of the Court of Chancery. This is because, while partnership is a consensual arrangement based on agreement, it is more than a simple contract (to use the expression of Dixon J in McDonald v Dennys Lascelles Ltd 48 CLR 457, 476); it is a continuing personal as well as a commercial relationship. Neither during the continuance of the relationship nor after its determination has any partner any cause of action at law to recover moneys due to him from his fellow partners. The amount owing to a partner by his fellow partners is recoverable only by the taking of an account in equity after the partnership has been dissolved: see Richardson v The Bank of England (1838) 4 My & Cr 165: Green v Hertzog [1954] 1 W.L.R. 1309. Only the Court of Chancery was equipped with the machinery necessary to enable such an account to be taken, and the basis upon which the account was taken reflected equitable principles. These could be modified by agreement, but they did not find their source in contract.
The basic principles of partnership law are set out in the Partnership Act 1890 which was drafted by Sir Frederick Pollock and is still in force today. It codified (though not exhaustively) the law of partnership and reflected the pre-existing principles of equity which had been developed by the Court of Chancery. These did not include the contractual doctrine of repudiation. It is noticeable that section 1 of the Act, which defines the concept of partnership makes no reference to contract. It defines partnership as ‘the relation which subsists between persons carrying on a business in common with a view of profit.'”
In my judgment, that statement of principle undermines the legal basis of Mr Cowan’s claim in the county court. It was not open to him to bring a claim at law for damages against his partner and so it was equally not open to the judge to make the damages award that he did. This is not to say that Mr Cowan did not have a claim for an account against Mr Wakeling, although it would appear from Lord Millett’s observations that the partnership must be dissolved before any such claim could be made. The judge did not take this point in dealing with Mr Cowan’s claim, but I would make no criticism of him for not doing so. The claim came before him on no prior notice and the point was not drawn to his attention. Had he raised the point, a question would also have arisen as to whether the county court had jurisdiction to entertain any claim for an account that Mr Cowan had then sought to pursue. That is because the county court’s jurisdiction in dealing with the dissolution or winding up of a partnership is confined to cases where the assets of the partnership do not exceed £30,000, whereas the assets of this partnership did exceed that amount: see section 23(f) of the County Courts Act 1984. It may therefore be that any claim for an account by Mr Cowan could only have been pursued in the Chancery Division of the High Court.
In this court, however, matters have moved on. First, we have been told by Mr Cowan that he has in fact now commenced proceedings for the dissolution of the partnership and for the taking of an account. He apparently commenced those new proceedings in the county court but we have been told that they have since been transferred to the High Court, presumably to the Chancery Division. During the course of argument this morning the court made the suggestion to the parties that a practical way forward towards the bringing of these protracted proceedings to an early conclusion would be for the parties to consent to an order that the partnership is dissolved and, further, to treat Mr Recorder Price’s damages award as constituting the taking of the account of what is due from Mr Wakeling to Mr Cowan on the winding up of the partnership. On that basis the issues on the appeal would then be whether either or both of the only two figures the subject of challenge should be the subject of adjustment. Both Mr Cowan and Mr Wakeling expressly consented to an order, if necessary, to achieve this result and to our dealing with the appeal on this basis. They further agreed to an order for the sale of the property, with the conduct of the sale being committed to Mr Wakeling’s solicitors. I would pay my own tribute to their practical good sense in agreeing to a course which ought to reduce to a minimum any further litigation in this long drawn-out dispute.