Simple partnerships are very common structures for conducting businesses, despite companies and Limited Liability Partnerships (LLPs) growing in popularity. This is no doubt because of the ease and informality in which one can create a partnership. However, this informality can often cause problems for the partners later down the line should a dispute arise. This article looks in more detail at resolving partnership disputes.
We recommend that you put a proper Partnership Agreement into place upon the formation of the partnership. These set out rules as to what will happen when a partner retires or when the partners fall into dispute. Where there is a Partnership Agreement in place, any dispute between the partners will be determined in accordance with the agreement.
Often, the Partnership Agreement will have an expulsion clause, allowing the remaining partners to expel either an underperforming or an offending partner from the partnership. However, where a Partnership Agreement does not exist, the situation becomes much more complicated as the parties are forced to rely upon the provisions of the Partnership Act 1890.
In company disputes, the shareholders have options such as derivative claims and unfair prejudice claims. In partnership disputes, however, there are fewer options. For example, the court does not have the power to order the expulsion of an offending partner. The only power available to the court to resolve partnership disputes is to dissolve the partnership in its entirety. Nonetheless, the remaining partners may use this power as a tactic to persuade the offending partner to leave without a fight. This is on the basis that the dissolution of partnership could ruin the value of the partner’s respective share; therefore distinctly reducing the amount that he would receive as compensation.
On what grounds can a partnership be dissolved?
The first is voluntary dissolution. Should all the partners agree together that the partnership has run its course or that it should for any other reason dissolve, then the partners acting together can dissolve the partnership by consent.
The second, most likely option, is an application to the court relating one partner’s misconduct under s.35(c) of the Partnership Act. If a partner is guilty of conduct, which in the court’s opinion (and taking into regard the nature of the business) prejudicially affects the carrying on of that business, then the court can order the partnership dissolved. Exactly what type of conduct falls into s.35(c) is up for debate, but there are some precedents. For example, criminal conduct, particularly offences involving dishonesty, would fall within s.35. Likewise, a court may consider it misconduct if a partner runs a business in direct competition with the partnership. Immoral conduct may also in some cases fall into s.35. The conduct would have to be serious and linked to the nature of the business.
Partners may also apply to court for dissolution where a partner is in persistent breach of the Partnership Agreement. For example, if they have failed to account for the firm’s money or have used the firm’s funds for their own personal purposes. Conversely, a partner making an application under this section may be a wronged partner who has been unlawfully and wrongfully excluded from the partnership by the other partners.
Clearly, what this demonstrates is the need for a strong and comprehensive Partnership Agreement. Without such an agreement, people in partnership disputes only have the rather heavy-handed option of asking the court to dissolve the partnership. Clearly, this is unlikely to be a desirable option for the remaining partners where the partnership is a flourishing business. The threat of dissolution can act as a bargaining chip with the offending partner. However, it is important to note that there is no guarantee this will work. Clearly there can be no substitute for a properly drafted Partnership Agreement.