UNIT 14

FORMATION OF PARTNERSHIPS

A partnership is defined under Section 1 of the Partnership Act, Cap P17, Laws of the Federation of Nigeria (LFN) 2004, as the relationship that exists between persons carrying on a business in common with a view to profit. This definition highlights three essential elements which includes the following:

1. Association of persons: this is where there must be at least two persons involved.
2. Common business: this is where the business must be carried on in common.
3. Profit motive: this is where the business must be conducted with the intention of making a profit.

METHODS OF FORMATION OF PARTNERSHIPS

Partnerships can be formed in the following ways:

1. By agreement: This is the most common method and involves a partnership deed or agreement that sets out the terms and conditions of the partnership. This agreement can be oral or written.
2. By conduct: this is where partnerships can be implied from the conduct of the parties, especially when they act in a manner that suggests they are in business together.
3. By estoppel: this happens if someone represents themselves as a partner and a third party relies on this representation to their detriment, the individual may be estopped from denying the partnership.

CONTENTS OF A PARTNERSHIP AGREEMENT

A partnership agreement typically includes the following:

1. Name of the partnership.
2. Nature of the business.
3. Duration of the partnership.
4. Capital contributions of each partner.
5. Profit and loss sharing ratio.
6. Management duties and responsibilities.
7. Procedure for admitting new partners.
8. Method of resolving disputes.

TERMS OF PARTNERSHIP

The terms of a partnership are governed by the partnership agreement and, in its absence, by the default rules of the Partnership Act. Key terms often include the following:

1. Capital contribution: this specifies the amount of money or assets each partner contributes to the partnership.
2. Profit and loss sharing: this outlines how profits and losses are to be distributed among the partners. Unless otherwise agreed, partners share equally in profits and losses (See section 24(1) of the Partnership Act).
3. Management and decision-making: this determines how decisions are made within the partnership and who has authority to act on behalf of the partnership.
4. Salaries and drawings: this states whether partners are entitled to salaries and how much they can draw from the partnership’s funds.
5. Interest on capital: this specifies if partners are entitled to interest on their capital contributions.

DUTIES OF PARTNERS

Partners owe certain duties to the partnership, including the following:

1. Duty of good faith: this is where partners must act honestly and in the best interest of the partnership.
2. Duty to render accounts: this is where partners must provide full information and render accounts of all things affecting the partnership.
3. Duty to refrain from competing: this is where partners should not compete with the partnership business.

RELATIONSHIP BETWEEN PARTNERS AND THIRD PARTIES

1. Agency principle: this is where each partner is an agent of the partnership and other partners for the purpose of the business (See section 5 of the Partnership Act). This means that partners can bind the partnership in contracts with third parties if they act within their authority, and the partnership is liable for the wrongful acts or omissions of a partner if committed in the course of business.
2. Liability to third parties: this is where partners are jointly and severally liable for the debts and obligations of the partnership. This means a creditor can pursue any one or all partners for the full amount owed. See the case of Makwe v. Nwukor (2001) 14 NWLR (Pt. 733) 356 which reinforced the principle that partners are jointly and severally liable for the debts of the partnership.

DISSOLUTION OF PARTNERSHIP

A partnership may be dissolved in several ways which includes the following:

1. By agreement: this is where the partners may agree to dissolve the partnership at any time.
2. By expiry: this is where the partnership dissolves automatically if it was formed for a fixed term or a specific purpose and the term expires or the purpose is achieved.
3. By notice: In a partnership at will, this is where any partner can dissolve the partnership by giving notice to the other partners.
4. By death or bankruptcy: this is where the death or bankruptcy of a partner usually results in dissolution unless otherwise agreed.
5. By court order: this is where a court may order the dissolution of a partnership under certain conditions, such as insanity or incapacity of a partner, or if the partnership business can only be carried on at a loss.

EFFECTS OF DISSOLUTION

Upon dissolution, the partnership ceases to exist, the partners must wind up the affairs of the partnership, which includes paying off debts, distributing remaining assets, and completing unfinished business and the partners remain liable for partnership debts incurred before dissolution. See the case of Ayodeji v. Olaniyi (2001) 11 NWLR (Pt. 725) 610 which provides guidance on the dissolution of a partnership by notice and the subsequent winding up of its affairs.

CONCLUSION

In summary, partnerships in Nigeria are governed by the Partnership Act and the terms set out in the partnership agreement. Understanding the formation, terms, relationships with third parties, and dissolution processes is crucial for partners to navigate their rights and obligations effectively.