Partnership Dispute Solicitors

This was a bitter dispute which resulted in the dissolution of the partnership.

There were disagreements between the parties as to how many partners were in the partnership and when (and whether) one of the partners had retired, which affected what the split of profits would be upon dissolution.

There were also arguments regarding whether property was an asset of the partnership or whether it was owned by two of the partners as individuals, and therefore should be excluded from the valuation of the partnership.

Legal proceedings were issued for various declarations, with the claim being compromised before trial.

This case involved a dispute over the interpretation of the partnership deed and the calculation of the exiting partner’s capital account payment.

The dispute resulted in the partnership being dissolved by the service of a Notice of Dissolution and the client exercising an option to purchase the share of the outgoing partner.

The matter was formalised by a Deed of Dissolution and Transfer. The goodwill, interest and assets of the partnership vested in the client who carried on the business as a sole trader.

We advised the partner on his entitlements upon his retirement from the partnership under the partnership deed and securing the rightful entitlements.

This involved advising on issues relating to:

• Breaches of statutory rights and duties of partners under the Partnership Act 1890
• Breaches of the terms of the partnership agreement
• Disputes over share of profits, distribution of assets and reconciliation of debts
• Liability of partners
• Suspension, expulsion or retirement of a partner
• Dissolution or winding up of a partnership

A partnership consists of two or more individuals who carry on a business in common with a view to making a profit.

Partnerships can be formalised by a partnership agreement (sometimes called a partnership deed) which sets out how the partnership will be run, or they can be informal, in which case they are referred to as a partnership at will.

As partnerships are often informal, individuals can find themselves in partnership without even knowing they are and, when problems arise in the partnership, may find themselves in the middle of an often messy and costly legal dispute.

It is a matter of fact whether a partnership exists, looking at the substance of the arrangement as opposed to the intention of the parties.

Without a partnership agreement, the partnership will be governed by the Partnership Act 1890.

The Act contains a set of standard rules by which the partnership should conduct its business. However, the rules are not comprehensive and often leave many matters to be determined, which can often result in disputes.

Some of the key terms of a partnership act will include:

• Partners are entitled to share equally in the partnership's capital and profits and must contribute equally towards losses.
• Every partner is an agent of the firm for the purpose of the partnership business.
• Every partner should take part in the management of the partnership.
• When a partner dies or retires, the partnership automatically comes to an end.
• The partnership can be dissolved by any partner giving notice.

Partners are jointly and severally liable for all debts relating to the partnership, and liability is unlimited since a partnership is not a separate legal entity (unlike an LLP or limited company). If the partners have changed over time, it is important to ascertain the identity of the partners at the specific point any liabilities were created.

Unless there is an agreement to the contrary, a simple majority can make standard business decisions affecting the partnership. Decisions regarding the nature of the partnership business require unanimity.

Partnership property includes property originally brought into the partnership stock or acquired for the purposes and in the course of the partnership business.

Whether or not the property is partnership or owned by an individual partner or partners can often be a point of contention if no written agreement clearly sets out the partnership assets.

It is not uncommon for a partnership to carry on a business from property owned by an individual partner or for a partnership to be allowed to use assets belonging to an individual partner, but the terms of the occupation or use need to be made clear to ensure that the property is not treated as partnership property.

Usually, the partnership's accounts will clearly state what are and are not partnership assets, but it is preferable that the matter be covered by an express agreement, as there have been occasions when the courts have not accepted the accounts' evidence.

Unless there is an express power of expulsion set out in a partnership agreement, there is no automatic right to expel a partner from the partnership.

In such circumstances, it will be necessary for the partners to reach an agreement. If no agreement can be reached, it may be necessary to dissolve the partnership.

If there is a partnership agreement in place, this will usually dictate the steps required to be taken to dissolve the partnership. These must be carefully followed to ensure the dissolution is properly effected. If the partnership is a partnership at will, it may be terminated at any time by notice given by any partner to the others.

There are various methods to dissolve a partnership and it is often complex. Dissolution may not in itself terminate all rights and obligations of the partners.

For example:

• Partners of the dissolved firm will remain bound by any obligations entered into prior to the dissolution;
• If proper notice of dissolution has not been provided, contracts entered into by one of the partners may legally bind all of the partners;
• After dissolution, the partnership relationship will continue insofar as is necessary to properly wind-up the affairs of the partnership and complete any outstanding transactions entered into prior to dissolution.

In order to ensure there are no outstanding issues, it is preferable for a deed of dissolution to be prepared. This will set out each partner’s liabilities and obligations going forward.

This is often the most contentious issue in the dissolution of a partnership or exit of a partner as it will determine how much money each partner will receive following the dissolution or what the exiting partner will receive once they leave the partnership.

The partnership accounts are important in this respect, and an expert forensic accountant may be required to properly value the relevant share of the partnership owed to each partner. If the partnership owns property, a property valuation may also be required.

Once the partnership is dissolved, dissolution accounts will need to be prepared and agreed by all the partners in order to effect any final payments. The partnership’s accountants will most likely need to be involved from an early stage.