Partnership agreements: disputes: partnership break-up

Partners owe to each other fiduciary duties, that is to say:

  • a duty of the utmost good faith
  • to act honestly towards the other partners
  • to act for the benefit of the partners as a whole
  • not to put themselves into a position where their duty to the firm and their own interests conflict
  • Partnership agreements & disputes
  • to make full disclosure of any fact relevant to the partners
  • not to make an unauthorised personal profit

The duty extends to negotiations leading to the establishment of the partnership

And is still owed by an outgoing partner to the partnership, after a dissolution, until the firm is wound up

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Advising on partnership agreements & disputes arising

We can help you in addressing issues such as:

  • the level of personal investment to be required from each partner
  • the allocation of profits and losses between partners
  • the procedure for making decisions at the firm and resolving disputes
  • the procedure for admitting and removing partners
  • the procedure for dissolving the partnership.

What is a partnership?

The Partnership Act 1890 defined partnership as “the relation which subsists between persons carrying on a business in common with a view to profit”. Excluded from this definition is any company registered under the Companies Act, as these bodies have their own set of statutory rules. Persons who have entered into partnership with each other are collectively called a “firm”.

There must be at least two people involved in a partnership (although not necessarily natural people as companies can be partners with natural people or with other companies). Also some element of agreement is involved. The agreement does not have to be in writing, however; indeed, it need not be verbal at all – it can be implied from conduct in the absence of any express agreements.

If there is any dispute about the existence of a partnership, it will be for those alleging that the partnership exists to prove that it does, and it may well be that the date stated in the written partnership agreement (if there is one) is the best available evidence.

The persons concerned in a partnership must be carrying on business “in common” and “with a view to profit”. Thus, associations of persons formed for a non-profit-making purpose cannot in law amount to partnerships. This rule affects associations formed for charitable purposes but is also important for members’ clubs, which are often formed with the intention of covering their expenses but not of making a profit.

Establishing a partnership (or firm) is an attractive option for two or more people wishing to enter business together without starting up a new company. By comparison with other methods of arranging a business, a firm can begin trading very quickly, with fewer formalities and all partners working on a self-employed basis. The prudent course is to put in place a written partnership agreement when starting up a new firm. This allows the structure of the business relationship to be clearly determined, meaning that in the long term, things will run more smoothly.

It is important to bear in mind that a traditional partnership does not have a distinct legal identity. Instead, all partners must jointly bear the liability for debts the business incurs. This means that if you enter into a traditional partnership, your personal assets could be at risk for any unpaid debts incurred by you or your partners in the course of business.

Relationship between partners and outsiders

Every partner is an agent of the firm for the purpose of the partnership business. The firm is therefore liable as principal for commitments entered into by each partner in the usual course of the business of the kind carried on by the firm. A single partner has, as regards the outside world, a very wide authority to bind the firm, which has been held to include hiring and firing of employees, buying and selling goods and drawing cheques. Certain acts of a less normal character have been held to be outside the scope of a partner’s authority, such as executing deeds, giving a guarantee on behalf of the firm and authorising any third party to use the name of the firm. A partner cannot bind the firm where he has purported to pledge its credit for a purpose apparently not connected with the firm’s ordinary business, without specific authority from the firm. The individual partner giving the commitment will, though, remain liable.

The liability of partners for each other’s acts, (joint, joint and several or several) will vary depending on the acts in question. For example:

  • Partners are jointly responsible for the contractual debts of a partnership. If a creditor obtains judgment against one, or a number of the partners, this will not discharge the others. However if he enters into a compromise with the defendant partner(s) this will operate to release the other partners.
  • The estate of a deceased partner has several liability for the debts of the firm to the extent that they are not otherwise satisfied.
  • Wrongful acts or omissions, such as torts, of any partner acting in the ordinary course of the business or with the authority of the other partners gives rise to joint and several liability. The same is the case where a partner acting within the scope of his apparent authority receives money or property from a third party and misapplies it and where the firm, in the course of its business, receives such money or property and it is misapplied by one or other of the partners while in the custody of the firm.

Relationship between partners

A fiduciary relationship arises where two parties agree that one party will act on behalf of or for the benefit of the other in circumstances that give rise to a relationship of trust and confidence. To determine whether a relationship is fiduciary, the substance of the relationship must be examined in light of its commercial context and all the obligations that are undertaken.

Partners owe to each other fiduciary duties, that is to say, a duty of the utmost good faith, that is, to act honestly towards the other partners, to act for the benefit of the partners as a whole, not to put themselves into a position where their duty to the firm and their own interests conflict, to make full disclosure of any fact relevant to the partners and not to make an unauthorised personal profit. The duty extends to negotiations leading to the establishment of the partnership and is still owed by an outgoing partner to the partnership, after a dissolution, until the firm is wound up.

Limited Liability Partnerships (LLPs)

A similar vehicle for consideration, and which our lawyers are able to assist you in setting up, is a Limited Liability Partnership (LLP). This option is very similar to that of a traditional partnership and offers much of the same organisational flexibility, still with fewer formalities than a limited company will encounter. However, an LLP will have to deal with more paperwork than a traditional partnership. The application to register the LLP must be submitted to and approved by Companies House.

As the name suggests, the LLP offers an important advantage, in that liability is borne by the LLP. The partners’ personal assets are therefore only at risk to the extent that they have been invested into, or guaranteed to the LLP.

Transferring into a limited liability partnership

Where partners in an existing partnership want the benefits of limited liability they can transfer the entire business to a limited liability partnership (LLP) which has already been incorporated.

Key features of an LLP

The key features of an LLP are that:

  • It is a body corporate and therefore a legal entity separate from its members. An LLP is incorporated by registration at Companies House.
  • An LLP has unlimited capacity and can do anything that a legal person can do.
  • LLP members have limited liability in that, generally, they do not need to meet the LLP’s liabilities. However, in some circumstances a member may have to contribute to the LLP’s assets. For example, if a member:
    • is guilty of misfeasance or falls within special clawback provisions under the Insolvency Act 1986;
    • must contribute by agreement between the members; or
    • is a sole member of the LLP trading as such for more than 6 months.
  • It is taxed as a partnership.
  • An LLP has the organisational flexibility of a partnership. The members are free to agree:
    • how to share profits;
    • who is responsible for management and how decisions are made;
    • when and how new members are appointed; and
    • the circumstances in which members retire.
  • Any members’ agreement (LLP agreement) is a private document which is confidential to the members. It does not need to be publicly filed.
  • It has no share capital. There are no capital maintenance requirements and, unless otherwise agreed between the members, there is no obligation for members to contribute capital to the LLP.
  • Its accounting and filing requirements are broadly the same as those of a company.
  • It can create floating charges over its assets in favour of lenders.

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