2 Partners can pay their employees or agents by a share
of profits.It has long been the practice of some organ-
isations to pay employees in part by some profit-sharing
scheme. The Act makes this possible without putting the
employees at risk of being regarded as partners and
liable for the debts of the firm if the true partners run
into money trouble.
The provision is also important to the true partners
because the giving of labour is sufficient to form a partner-
ship: the putting in of money by way of capital is not
essential. So this provision makes sure that the employees
themselves cannot claim to be partners just because they
are sharing profits under an employees’ scheme.
3 Partners can pay interest on a loan by a share of net
profits provided that the contract of loan is in writing
and signed by all the parties to it.This provision will
protect a lender if a creditor tries to make him liable for
the debts of the firm he has lent the money to, as where the
creditor argues that the lender is really a dormant partner.
However, the lender must not take part in the run-
ning of the business. Remember also that the lender will
not need the protection of this provision if he is paid
a fixed rate of interest on his loan, e.g. 8 per cent per
annum instead of 8 per cent per annum of the profit. If
he is paid 8 per cent per annum interest, he is clearly a
creditor and not a partner.
Do not think, because there is no written contract,
that a lender will always be a partner. It is still a matter
for the court to decide if it is argued that he is. Normally
a properly drafted written contract should persuade the
court that the lender is not a partner.Deferred creditors
Under s 3, those receiving money from the firm under
point 3 above are deferred creditors if the partners go
bankrupt during their lifetime or die insolvent.
Lenders will not get any of the money owed to them
until all other creditors have been paid £1 in the £.
Thus, lenders of money do not get the best of both
worlds. Section 2 provides that they do not become part-
ners and liable for debts, but s 3 makes them deferred
creditors if the partners are insolvent.Types of partners
Partners are of different types in law as set out below.Part 2Business organisations
114
A model form of partnership deed suitable for an
ordinary partnership is provided later in this chapter. This
shows what is normally dealt with by such agreements.
The sharing of profits as evidence
of partnershipAt one time the sharing of profits was almost conclusive
evidence of informal partnership. During this period a
number of everyday business transactions could give rise
to a partnership, though the parties did not want this
because of the possibility of incurring liability for another’s
debts (but see now M Young Legal Associates LtdvZahid
Solicitors (a firm)(2006): sharing of profits not essen-
tial). The position was eventually clarified in regard to
certain business transactions, some of which are set out
below, by s 2(3) of the Act of 1890. These statutory pro-
visions are still valid, since M Young Legal Associates Ltd
(2006) was not concerned specificallywith them, but
with the general definition in s 1.
1 Partners can pay off a creditor by instalments out of
the profits of the business. This comes from the follow-
ing case which was decided before the 1890 Act.
Coxv Hickman(1860)A trader had got into debt and his creditors decided that
instead of making him bankrupt and getting only a pro-
portion of what he owed them, they would let him keep
the business but supervise him in the running of it and
take a share of the profits each year until their debts
were paid in full.
An attempt was made in this case to make one of the
supervising creditor/trustees liable for the trader’s debts
as a partner. But was he a partner? The court said he
was not. He was a creditor being paid off by a share of
profits.
Comment.
(i)There was, in addition, no mutual participation in
trade here, but a mere supervision of the business. Of
course, if creditors assume an active role in manage-
ment they may well become informal partners.
(ii)The more modern approach would be for the cred-
itors to ask the court for the appointment of a receiver to
run the business. Obviously, he would not be regarded
as a partner since that would hardly be his intention.