When you work in partnership with someone, you need to trust them implicitly. You also need a shared vision, a common business plan, and clarity over your respective roles and responsibilities as you strive to achieve your objectives.  

But what happens when the trust is lost and the relationship between partners breaks down? Whether this is because of a lack of commitment or a disagreement over something fundamental, such as restructuring the business to cope with Covid-19, it will need to be addressed. 

What are your options for trying to find a way forward? And, how can you reduce the risk of matters getting out of hand and escalating into a protracted and costly partnership dispute?

The answers to these, and other common questions that arise when a partnership or an LLP turns sour, are considered by Richard Shears, a dispute resolution solicitor and founder of Shears Law.

Dealing with a partnership in conflict

Disagreements within a partnership need to be handled with care, particularly where they have the potential to cause disruption to the business. Every partner needs to lay their cards on the table, outline where they stand, and be clear about what it is they want to achieve.

Sensible and pragmatic discussions then need to be had to determine whether the partnership can survive.  If not, you will have to determine whether the best option would be for certain partners to leave while the others continue, or for the partnership to be dissolved.  

These discussions will not be easy and they should only be attempted once you and the other partners have had an opportunity to take legal advice and to consider your options carefully in light of the advice received.

You may want to expel an underperforming or difficult partner but that may not be a course of action that is open to you.  The rules around partnerships are complex, which is why it is always preferable to have an experienced lawyer by your side to guide you through the process and to ensure that any action you propose to take is both lawful and appropriate. 

Starting point 

There are only two ways in which a partner can be removed from a partnership or an LLP. The first is through resignation and the second is through an involuntary departure, forced by the other partners in accordance with the terms of a partnership agreement.

Where no partnership agreement exists, or where no power of expulsion is conferred, a forced departure cannot be effected. In these circumstances, the only options will be to try to persuade the partner you are having difficulty with to leave, or else to bite the bullet and have the partnership dissolved so that you can cut your losses and start again.   

Negotiating a voluntary departure

Persuading a partner to exit a business arrangement which is no longer working can be relatively easy where relations remain amicable and there is broad agreement that it is in everyone’s interests for a deal to be done. However, it can be much harder to achieve where distrust has begun to creep in and where the problematic partner is reluctant to go. 
In this scenario, it can be helpful for a dispute resolution lawyer to support you in your discussions and ensure that you maintain a level head and a pragmatic mindset.  They can also ensure that you deal effectively with any potentially contentious issues, such as: 

•    the outgoing partner’s obligations under post-exit restrictions;
•    their continuing liability under personal guarantees or a commercial lease; and
•    their right to bring a breach of contract, unfair dismissal or discrimination claim. 

In most of the cases we deal with, we find that settlement can normally be agreed through written communications, face-to-face meetings or via an independent mediation process.

Partnership dissolution 

Where an agreed exit cannot be secured, thought will need to be given about whether the partnership should be dissolved and how this can be achieved. 
Depending on the circumstances there may be several options, including:
•    invoking a dissolution clause within your partnership agreement, if you have one;  
•    serving a notice of dissolution where you can establish that your partnership is a partnership ‘at will’, that is one that is open-ended, not operated as an LLP and not covered by a partnership agreement; 
•    applying to the court for a dissolution order on the grounds that this is just and equitable, for example because your partner’s behaviour has become so intolerable that it is not reasonably practicable for you to continue to work with them; or 
•    persuading all partners that a dissolution is the best way to proceed and thereby procuring their agreement to take this step by mutual consent. 

A lawyer can help you to decide on the most appropriate route to take and also ensure that you address key considerations before proceeding, such as:
•    how each partner’s share in the business will be valued;
•    your respective liabilities for ongoing debts; 
•    the status and enforceability of personal guarantees and indemnities; 
•    the right to continue to use the partnership’s name or brand; 
•    any restrictions on the establishment of a successor business; 
•    what happens to the partnership’s suppliers and customers; 
•    what happens to the partnership’s confidential information and intellectual property; 
•    how the partnership’s final accounts should be dealt with; and
•    how settlement of the partners’ affairs should be structured in order to maximise tax efficiency, particularly from a capital gains and inheritance tax perspective. 

Conclusion

Partnership disputes can arise for a variety of reasons and are on the increase due to the stresses and strains being put on business relationships by the coronavirus pandemic. Tackling them head on, and at an early stage, can greatly increase the chances of everyone involved achieving a good outcome, but it is important that you take specialist advice on your options to ensure that you make the right choices.

In the best case scenario, a lawyer can help you to enforce the terms of your partnership agreement to effect the unilateral removal of a difficult partner or to negotiate a fair and reasonable settlement which sees them leave voluntarily, with the minimum amount of disruption.  In the worst case scenario, they can support you in taking the matter to court and in achieving the best possible outcome given your own particular circumstances.  

For further information on partnership disputes, or any other type of dispute linked to your business or commercial interests, please contact Richard Shears on 0800 020 9495 or rds@shearslaw.co.uk. 

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.