Where a person joins with other people to conduct business for getting profits, this is a partnership business. The Hong Kong Partnership Ordinance defines partnership as the relation which subsists between persons carrying on a business in common with a view of profit. The law looks at the intention of the parties. When a person receives a share of the profits of a business, this is apparent evidence that he is a partner in the business. A partnership can have partners up to a maximum of 20.
Partners’ Rights and Obligations
The rights and obligations of the partners in a partnership business, including their relations to outsiders, are governed by their partnership agreement, which can be verbal or written, and the Partnership Ordinance.
If the partners do not have an express term in their agreement to govern a particular matter, relevant provisions in the Partnership Ordinance will be implied into their relationship to prescribe how they can deal with the matter.
(I) Relations of partners to persons dealing with them
Power of partners to bind partnership firm
Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership. If a partner does any act for carrying on of the partnership business, it will bind the firm and his partners. Certainly, the act should be carried on in the usual way business of the kind carried on by the firm.
However, if the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority or does not know him to be a partner, the partner’s act will not bind the firm and his partners.
The outcome is logical because an outsider would not know what has been agreed between the partners. As every partner is an agent of the firm, it is right for the outsider to presume that the partner has authority to sign the contract and he would rely on such to hold the firm liable, unless he really knows that this is not the case, e.g. he has been informed in advance of the scope of authority of the partner in the firm, then he cannot impute that the firm is bound by the act of the partner in that particular matter.
Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner. However, a judgment recovered against any person liable in respect of any debt or damage shall not be a bar to an action against any other person who is jointly liable with him. In other words, a creditor has a judgment against a partner liable in respect of the firm’s debt cannot be used as an excuse to prevent the creditor to hold and demand other partners liable for the same debt. Therefore, every partner in a firm is not only jointly but also severally liable for all the debts of the firm.
IMPORTANT: An investor may want to set up a partnership business so as to reduce his risk in running the business, but in fact he can be held liable for ALL the debts incurred in the partnership business. Certainly, if every partner can pay his share of debts incurred by the firm, it is right to say that a partner only needs to pay his own share. This also reminds an investor how important his partners in a partnership are. They should be reliable, trustworthy and what’s “richer” enough to pay the debts incurred by the partnership firm.
Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, loss or injury is caused to any person, the firm is liable to the same extent as the partner so acting or omitting to act. This is similar to the situation that an employer is vicariously liable for the wrongful act of his employee in the course of employment.
(II) Relations of partners to one another
The following are the main implied terms from the Partnership Ordinance regarding the relations of partners to one another:
The mutual rights and duties of partners, whether reached by agreement or defined by the Partnership Ordinance, may be varied by the consent of all the partners.
It does mean that anything can be changed in a partnership with the approval of all the partners.
Every partner has a fiduciary duty to the firm and the other partners. “Fiduciary” generally means trustworthy, honest, fair and reliable. There are three important duties of partners to the firm. They are:
Partners are bound to render true accounts and full information of all things affecting the partnership to any partner.
If a partner derives any benefit from any transaction concerning the partnership or from any use by him of the partnership property, name, or business connection without the consent of the other partners, the partner must account to the firm for the benefit.
A partner cannot, without the consent of the other partners, carry on any business of the same nature as and competing with that of the firm. If he does so, he must account for and pay over to the firm all profits made by him in that business.
It is therefore important for a partner to consult and get the consent of the other partners before he carries on any business to compete with the firm.
A partnership agreement is to regulate the relationship between the partners. The partners can express their preferences as to how to run a business and what their personal concerns are so that an agreement can be reached between the partners. This can avoid future dispute.
Generally, a partnership agreement will provide terms on the partners’ relationship, such as:
Procedure for Setting up Partnership
Persons who conducts business in Hong Kong under a partnership agreement must register with the Business Registration Office of the Inland Revenue Department within one month of the commencement of business.