350 Chapter 12Partnership, limited liability partnership and choice of legal status
to remain as directors. When a buyout of shares in a quasi-partnership is ordered, the shares
should be valued as a pro rata share of the overall company.
The rights of partners to manage the firm and of LLP members to manage the LLP will
usually be regulated by a formal agreement. Such an agreement can be changed only by
unanimous consent and so individual partners and individual members of LLPs are much
better protected than company members.Agency
The board of directors are the agents of a company, and this means that they can make
binding contracts on the company’s behalf. The shareholders, no matter how large their
shareholding, are not the company’s agents and cannot make contracts on its behalf.
Every partner is an agent of the firm in respect of contracts made in the ordinary course of
the firm’s business. It is therefore absolutely vital that partners trust each other implicitly.
A dishonest partner can bankrupt fellow partners and there have been countless cases
where this has happened. A dishonest partner can order goods in the firm’s name and take
possession of the goods. If he or she then steals the goods, the other partners are absolutely
liable to the suppliers for the price of the goods.
It is possible to have some safeguards over matters such as signing cheques, but liability
to outsiders dealing with the partner in good faith cannot be excluded. Of course, it is not a
good idea to form a company with a rogue, but at least limited liability restricts the amount
which can be lost. Nor is it only a dishonest partner who can bankrupt fellow partners. An
incompetent partner may be just as bad. If he or she makes disastrous contracts on the firm’s
behalf the firm will be bound to honour them.
LLP members are the agents of the LLP in the same way that partners are agents of the
firm. So they too can make disastrous contracts. However, these contracts bind the LLP, not
the members of the LLP. So the LLP could be made insolvent, but limited liability would
protect the members from personal liability. Even so, members could lose all of the money
which they had contributed.Withdrawal from the business
Partnerships may be entered into for a fixed period of time, in which case the partners
cannot leave before that time has expired (unless all of the partners agree). If partnerships
are not entered into for a fixed time they are partnerships at will. Any partner can leave a
partnership at will by giving reasonable notice of an intention to do so. If a partner does
withdraw, the firm will then be dissolved, and each partner will recover a share of any
surplus assets. If a partnership is for a fixed term, a partner wishing to withdraw must wait
until the end of that term. Even so, an end is in sight.
Members of an LLP have a right to leave the LLP by giving notice or by agreement with
the other LLP members. However, a member who is leaving will not have a right to share
in the assets of the LLP, unless an agreement has been made giving him such rights.
Ordinarily, there should be such an agreement, but if there was not, it might be impractical
for a member to leave.
In the case of companies, shareholders may or may not have a right to transfer their
shares to whoever they wish. It all depends on the articles of association, and these
might well say that the board of directors can refuse a transfer to persons of whom they
disapprove. It is even possible for the articles to say that the board of directors has