Clarifying the distinction between partners and their creditors: The first reformative partnership legislation

Abstract

This contribution reflects on the United Kingdom’s Act to Amend the Law of Partnership some 150 years after its promulgation. The statute was introduced to reform the common law rule that
a person who shares in the profits of a partnership is considered a partner and, as such, liable for partnership debts, which had become firmly enshrined in English jurisprudence. After a range
of parliamentary initiatives during the 19th century to alleviate the effect of the common law rule, the Act was passed in 1865. The statute provided that a person, who advanced money to, and
shared in the profits of an undertaking, would not be deemed a partner, provided that this was in terms of a written contract. It went further to declare such a lender a deferred creditor, should the
undertaking go bankrupt. In a preceding decision, Cox v Hickman, the House of Lords is considered to have established, in effect, that receipt of a share of the profits is not conclusive proof of a
partnership. From disparaging decisions handed down after the promulgation of the Act, it soon appeared that the judicature was more reform minded than the legislature, placing the emphasis
on the parties’ intention and the real substance of the agreement rather than on form alone. When the Act was repealed by the Partnership Act of 1890, it was not only substantially re-enacted,
but its provisions were made even stricter, notably the proviso regarding the existence of a not only written, but now also signed contract in sec. 2(3)(d). Although the law commissions of England,
Wales and Scotland proposed in 2003 that the sec. 2(3)(d) proviso be repealed as a relic of the past, it elicited no legislative response. Fortunately, this is one confusion that the South African law of
partnership was spared. Despite some early support for English decisions, the current approach is that a partnership is not formed, unless the participants’ contributions are subjected to the risks of the venture. Where capital is advanced on the basis that the full amount plus interest must be returned at a later stage, irrespective of the fortunes of the business, the agreement is one of loan and not partnership.