Keenan and Riches’BUSINESS LAW

Chapter 5Non-corporate organisations – sole traders and partnerships

other partners. Bearing this in mind, we can now pro-

ceed to consider the law of the ordinary partnership.

Definition

An informalpartnership is defined as ‘The relation

which subsists between persons carrying on a business

in common with a view of profit’ (s 1).

It should be borne in mind that if the parties have

agreed to be partners, then they will be. All the defini-

tion is saying is that any persons who carry on a business

in common with a view of profit are partners, even

if they have not expressly agreed to be. This is what we

mean by an ‘informal partnership’. The definition and

what follows should be understood in that light – it is

a definition of the facts required to make an informal

partnership.

Explanation and consequences

of the definition

1 The relation which subsists is one of contract.A

partnership is a contract based on being in business

together with the intention to enter a joint venture as

partners.

It is not, according to the House of Lords in Khan

v Miah(2001), necessary that the partnership has begun

to trade. It is essential that the partners have taken

some steps to evidence that the joint venture has been

embarked upon. This may consist of preliminary steps

taken to get ready to start business.

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The 12-month rule: earlier discharge

It is worth noting that subject to experience with the
current legislation the vast majority of bankrupts will
be discharged even sooner than the 12-month period
merely upon the Official Receiver conducting a small
investigation and filing a certificate in court. This pro-
cedure presupposes that the bankrupt is not culpable.

The ordinary partnership

Having considered the legal position of sole traders, we
now turn to the legal environment of the ordinary partner-
ship. The provisions relating to limited and limited liabil-
ity partnerships will be considered later in this chapter.

Definition and nature of a

partnership

The Partnership Act 1890 sets out the basic rules which
apply to this type of business organisation. All section
references in this chapter are to that Act unless reference
is given to some other Act.
In addition, the 1890 Act codified the case law on
partnership which there had been up to 1890. Some of
the cases we quote are earlier than the 1890 Act. We use
them because the 1890 Act was based upon them and
they are, therefore, examples of what the Act was trying
to achieve and presumably has achieved. The cases after
1890 are interpretations of the words used in the Act
following its being passed by Parliament.
The legal environment of the ordinary partnership is
much more complex than that of the sole trader and the
two environments have little in common except that in
both cases the corporate structure is not used. There are
similar restrictions on the choice of name, but, since a
partnership is an association of persons and a sole trader
regime is not, there are much wider rules to consider
in partnership. For example, the ability of a sole trader
to contract on behalf of the business, i.e. himself, is
obvious, but in the partnership situation, where there
are two or more individuals involved, questions arise
such as to what extent one partner, particularly if not
authorised by the others, can make a contract with an
outsider which will bind the firm and himself and the

Khan vMiah(2001)

Three persons agreed to set up an Indian restaurant.

The finance was provided almost entirely by one of

them. Before the restaurant opened (i.e. began to trade)

furniture and equipment were purchased and a laundry

contract was entered into. Advertisements were placed

and the freehold of premises was acquired by the person

who supplied the money. The parties then fell out and

the business did not proceed as planned. The question

arose as to whether the parties were partners during the

preliminary stages and who owned the assets acquired

with one person’s money. Were they partnership property,

bearing in mind that in the absence of a contrary agree-

ment partnership capital as represented by the firm’s

assets is owned equally by the partners regardless of