The Incorporation Services Act
The Incorporation Services Act specifically excludes the relation between the members of a company from the definition. Thus full incorporation, where all of the former partners become members of the new company, escapes the joint and several liabilities that attaches to every member of a partnership. As we shall see, the treatment of partial incorporation is not so straightforward.
The Act goes on in s 2 to lay down three rules to help determine whether or not a partnership exists. In summary, these rules are that the co-ownership of property does not of itself create a partnership, that sharing gross returns does not of itself create a partnership and that sharing profits is prima facie evidence of a partnership but does not of itself create one. It is immediately obvious that, far from giving yes/no answers, these rules underline the fact that there are no particular aspects of an arrangement that will determine whether or not it constitutes a partnership.
The consequence of this is that it is difficult for anyone to be certain whether KPMG's arrangement will or will not succeed, until all aspects of that arrangement are brought to light and scrutinised by the courts. No doubt KPMG's advisers have scoured the cases to find every example they can of arrangements that have been held not to constitute partnerships, in order to import as many of their characteristics as possible into the partial incorporation model.
This is reminiscent of the situation in Adam v Newbigging (1888) 13 App Cas 308, where Lord Halsbury LC commented: "The draftsman apparently looked at all the cases ... and cleverly strives to avoid the effect of each test discussed in these cases by something which should have the same effect, but which should avoid the specific test. I wish to say every such expedient would be absolutely void in the view I take of the law." KPMG has revealed that it will be relying on strictly drawn-up letters of engagement to isolate and distinguish the provision of audit services by the new company from the provision of other accounting services by the residual partnership. In this way, the firm presumably wishes to demonstrate that the company and the residual partnership are not carrying on a business 'in common', as is required by the statutory definition. The "in common" requirement has been interpreted to mean that, for a partnership to exist, there must be a single business, even if it is carried on in divisions. Thus it has long been held, for example, that no partnership exists between members of a mutual insurance society, because they do not carry on a single business in common (In re London Marine Insurance Association (1869) LR 8 Eq 176). Each member underwrites a policy for a stipulated sum, the policy thus constituting a series of separate contracts with each underwriter. Each underwriter is liable separately to the insured, and there is no sharing of profits or losses between the individual underwriters. However, the courts general approach was well summarised in another statement by Lord Halsbury in Adam v Newbigging, quoted in virtually every textbook on partnership law: 'If a partnership in fact exists, a community of interest in the adventure being carried on in fact, no concealment of name, no verbal equivalent for the ordinary phrases of profit and loss, no indirect expedient for enforcing control over the adventure will prevent the substance and reality of the transaction being adjudged to be a partnership; and I think I should add, as applicable to this case, that the separation of different stipulations of one arrangement into different deeds will not alter the real arrangement, whatever in fact that arrangement is proved to be.
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