Topic 6

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Topic 6 covers partnership law under the Partnership Act 1890 (as applicable in Nigeria) and the key provisions of CAMA 2020 governing business organisations. Understanding the distinction between different business structures — sole proprietorship, partnership, and company — is fundamental for advising clients on the appropriate form of business organisation.

Forms of Business Organisation:

Form	Owner	Liability	Governance
Sole Proprietorship	One person	Unlimited personal liability	Owner has full control
Partnership	2–20 (general); up to 50 (LLC)	Partners have joint and several liability	Partners manage collectively
Company	Shareholders	Limited to share capital	Directors manage

Types of Partnership:

• General partnership: All partners have unlimited liability and manage the business
• Limited partnership: At least one general partner with unlimited liability; limited partners’ liability is restricted to their contribution (but they cannot participate in management)
• Limited Liability Partnership (LLP): Partners have limited liability; governed by CAMA 2020

⚡ Exam tip: In a general partnership, each partner is both an agent of and principal for the other partners. Every partner can bind the firm in the ordinary course of business — the firm is liable for the torts of partners acting within the scope of authority.

---

🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

The Nature of Partnership:

A partnership is “the relation which subsists between persons carrying on a business in common with a view of profit” (Section 1(1) of the Partnership Act 1890). The key elements are:

1. Carrying on a business — includes every trade, occupation, or profession
2. In common — shared activity, not merely parallel activity
3. With a view of profit — excludes charitable or non-profit ventures

Tests for Partnership: The Partnership Act Section 2 provides rules for determining whether a partnership exists:

• Sharing of gross returns is not conclusive of partnership (may be rent, wages, etc.)
• Sharing of net returns is not conclusive (may be annuity, debt service)
• Community of profit is strong evidence but not conclusive
• Joint and several liability for debts is strong evidence
• Mutual agency: The most important test — partners are each other’s agents

The Partnership Agreement:

The partnership agreement (partnership deed) governs the relationship between partners. In the absence of express agreement, the Partnership Act 1890 applies by default:

• Profits and losses are shared equally (Section 24(1))
• No partner is entitled to interest on capital before profits are divided
• Every partner may take part in the management of the firm
• No partner may be introduced as a partner without the consent of all existing partners
• Differences arising from ordinary matters may be decided by a majority; no changes can be made to the fundamental nature of the business without unanimity

Rights and Duties of Partners:

Partners have the right to:

• Take part in management
• Access and inspect the partnership books
• An account of any transaction where they were not involved
• Indemnity for expenses and liabilities incurred in the ordinary course of business
• Prevent introduction of new partners without consent
• Prevent dissolution except in accordance with the partnership agreement

Partners owe each other duties:

• Utmost good faith — duty to disclose all material facts
• Not to compete with the partnership business without consent
• Not to make secret profits from partnership transactions
• Duty to act within authority and in the firm’s best interests

Liability of Partners:

Outward liability (to third parties):

• Partners are jointly and severally liable for all debts and obligations of the firm incurred while they are partners
• “Jointly” means the creditor must sue all partners together; “severally” means the creditor can sue any partner individually
• In Nigeria, creditors can elect to sue jointly or severally

Inward liability (between partners):

• Partners can seek contribution from each other (equal sharing unless otherwise agreed)
• A partner who pays more than their share can seek contribution from co-partners

Holding Out (Estoppel):

If a person represents themselves (or knowingly allows themselves to be represented) as a partner, they are liable to anyone who gives credit to the firm on the faith of that representation (holding out — Section 14 of the Partnership Act).

Dissolution of Partnership:

A partnership is dissolved:

1. By agreement of the partners
2. By expiry of the fixed term (if the partnership was formed for a fixed term)
3. By completion of the venture (if for a single venture)
4. By notice (if the partnership is at will — no fixed term)
5. By death or bankruptcy of a partner (unless otherwise agreed)
6. By illegality (if the business becomes illegal)
7. By court order (* decree of court*)

Court Order Dissolution: A court may order dissolution on the application of a partner if:

• A partner is of unsound mind or permanently incapacitated
• A partner other than the applicant is guilty of conduct prejudicial to the business
• The business can only be carried on at a loss
• It is just and equitable to dissolve (Ferguson v. Foundation)

---

🔴 Extended — Deep Dive (exam-level mastery)

For students preparing for top-rank selection.

The Doctrine of Agency in Partnership:

Every partner is the agent of the firm and of the other partners. The relationship of partnership is essentially one of mutual agency (Section 5 of the Partnership Act). This means:

• A partner’s acts on behalf of the firm bind the firm
• A partner’s knowledge is deemed to be the firm’s knowledge
• A partner’s fraud in the course of partnership business makes the firm liable

Implied Authority (Section 7):

Every partner has implied authority to bind the firm by:

• Selling goods in the firm’s name
• Purchasing goods for the firm’s business
• Receiving payment of debts due to the firm
• Engaging employees
• Borrowing money for partnership purposes (within limits)
• Drawing and endorsing bills of exchange and cheques

A partner does NOT have implied authority to:

• Submit disputes to arbitration
• Open a bank account in their own name
• Compromise debts due to the firm
• Promise a creditor that the firm will not be wound up
• Do anything outside the ordinary course of business

Limited Liability Partnership (CAMA 2020):

CAMA 2020 introduced the Limited Liability Partnership (LLP) as a new form of business organisation:

• Partners have limited liability (like company shareholders)
• At least two partners must be designated (their names appear on the certificate of registration)
• The LLP is a body corporate with separate legal personality
• Partners are not liable for the debts of the LLP beyond their contribution
• However, partners remain liable for their own wrongful acts (e.g., fraud)

Conversion of a Partnership to a LLP: Under CAMA 2020, an existing partnership firm may convert to an LLP by registering with the CAC (Corporate Affairs Commission). This preserves the continuity of the business while limiting partners’ liability.

Winding Up of a Partnership:

Upon dissolution, the partnership assets are applied in this order:

1. Debts due to third party creditors (outside the partnership)
2. Loans from partners to the firm (at the agreed rate; if not agreed, at 5% p.a.)
3. Capital contributed by partners (returned to partners)
4. Profit sharing ratio — any surplus distributed in the profit-sharing ratio

Deficiency (where assets are insufficient to pay all debts): Partners must contribute in the profit-sharing ratio (unless otherwise agreed) to make up the deficiency. A partner who pays more than their share has a right of contribution from co-partners.

Firm Name and Trading:

Under the Business Names Act 1961 (Nigeria), firms operating under a name different from the surnames of all partners must:

• Register the business name with the Corporate Affairs Commission
• Display the registered name at the business premises
• State the firm name and the partners’ names on all invoices and documents

Partnership Property:

Section 20 — Partnership property is property acquired for the purposes of the partnership. Once acquired, it belongs to the firm, not to individual partners. The firm’s property must be held and applied by all partners for the firm’s purposes.

Joint Venture:

A joint venture is similar to a partnership but more limited in scope — it is an agreement to collaborate on a specific project or transaction without constituting a full partnership. Nigerian courts apply the partnership tests to determine whether a joint venture relationship exists in substance.

Dispute Resolution in Partnerships:

Partnership disputes may be referred to arbitration if the partnership agreement contains an arbitration clause. Disputes between partners regarding the accounts of the firm may be referred to an accountant as an expert, whose decision is binding on the parties.

ICAN Practical Focus: Accountants frequently encounter partnerships in practice — particularly in audit and assurance engagements. Understanding the liability of partners, the rules on dissolution, and the priority of payment of partnership debts is essential for advising clients who are partners or considering forming a partnership.