Dissolution of partnership

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Dissolution of partnership

Dissolution of a partnership is always complex, more so if the partners are in dispute. We guide you through the process and preserve value.

We mainly support professional service partnerships, e.g. solicitors, vets, architects, accountants and surveyors. We provide solutions for entire partnerships and individual partners. We usually find practical solutions that avoid expensive litigation.

Dissolution of partnership: 5 ways

The law around dissolution of a partnership provides five ways:

1. By agreement

It is simple if the partnership agreement describes how the partnership will be dissolved. The partners must comply with the agreement.

Often there is a clause in the partnership agreement requiring less than a 100% vote to dissolve the partnership.  If there isn’t such a clause, then all partners, unanimously, at the same time,  must agree to dissolve the partnership.

This means the partnership cannot be dissolved by agreement, if partners previously agreed but subsequently change their mind.

2. Dissolution by notice

If the partnership is a partnership “at will”, any partner can dissolve the partnership “by notice”.

However, it takes very little for a partnership not to be “at will”. The relevant law is complex. Ways to establish the partnership is not “at will” include:

  • Any indication the remaining partners intended to continue the partnership if one partner leaves;
  • A written partnership agreement;
  • The partnership is an LLP;

Note, the concept of termination “at will” does not exist with companies.  Instead, shareholders vote to wind up the business.

3. By expiration

If the partnership was created for a particular project, or fixed period, the partnership is dissolved when appropriate.

For Ltd companies, the concept of expiration does not exist. The shareholders vote to have Companies House strike off the register of members. LLPs have a similar process.

4. Death or bankruptcy

Partnerships automatically dissolve if any partner dies or becomes bankrupt, unless otherwise agreed. Thus partnerships should have a written partnership agreement, with provisions that permit the partnership to continue.

If there isn’t a written partnership agreement, and the remaining partners had intended the partnership to continue, the Partnership Act is cumbersome.

If the business trades as a Ltd company or an LLP,  then the death or bankruptcy of a member does not cause the business to automatically dissolve.

5. By the court

Dissolution by the court is likely to be contentious, otherwise the partnership would dissolve by agreement. The court can dissolve a partnership on several grounds, including that dissolution is just and equitable, because e.g.:

  • The partnership comprises only two partners, who have fallen out;
  • The business can only be carried on at a loss;
  • A partner is:
    • Incapable of carrying on the business;
    • Guilty of conduct that detrimentally affects the carrying on of the business;
    • Is willfully or persistently in breach of the partnership agreement;
    • Behaves in such a way that it is not reasonably practical for the other partners to be in business with him.

Partnership dissolution: the best way

Negotiating the partnership dissolution is the best way. Often the partner’s relationship has broken down. Perhaps one or more partners intends to ask a court to dissolve the partnership.  If all partners recognise the breakdown, agree an orderly dissolution, then all partners are more likely to:

  • Save time and money;
  • Preserve the business;
  • Maintain their relationships;
  • Negotiate an agreement that is more flexible than a court imposed solution.

We find mediation often reconciles differences, at significantly lower cost.

Common issues

There are many issues to resolve. Thus there is scope for negotiation, and solutions that deliver greater value than a court’s.

Note that if the partnership is insolvent, then an insolvency practitioner must be appointed.  The final dissolution agreement usually covers:

A dissolution agreement usually covers:

  • Liability for any debts;
  • Which partner(s) take over the:
    • Business name,
    • Existing clients,
    • Work in progress;
  • Intellectual property: if valuable, establish intellectual property ownership to
    • Avoid subsequent infringement claims;
  • Broken contracts,
    • Partners may be personally liable if business contracts are broken;
  • Distribute assets, e.g stock, customer lists and contact details;
  • Final partnership accounts, including;
    • Final tax payments, which are often complex;
  • Management of the partnership’s records:
    • How stored,
    • Compliance with statutory and professional obligations;
  • Continuing professional indemnity insurance e.g. run-off insurance.

Remove a partner

It is often difficult to remove a partner. Often in a partnership that comprises at least three partners, some partners may want to expel a partner. This is possible, if the partnership agreement gives the group this power.

Otherwise, it is not possible, even for a court, to expel a partner and have the partnership continue. The partners must either:

  • Negotiate the partner’s departure;
  • Dissolve the partnership, and form a new partnership;
  • Convert to an LLP or Ltd company, where:
    • Automatic dissolution procedures do not apply.

Dissolving a partnership track record

Our track record for dissolving a partnership includes:

  • Enforced relevant dissolution provision with LLP agreement, to
    • Successfully negotiate our client’s exit;
  • Dissolved LLP architecture firm;
  • Negotiated and drafted our client’s exit through a deed of retirement.

LLP partnership dissolution case study

This case demonstrates how we avoided expensive court proceedings, because we forcefully applied the law.

Our client was one of two partners in professional services firm. The LLP partnership was doing reasonably well, but the partners increasingly argued. Each had his own practice and clients.

Our client wanted to terminate the partnership and start his own business. However, his partner was reluctant to terminate the partnership. Partly, this was because winding up the partnership was costly, and not tax-efficient.

LLP partnership break-up strategy

When the partners set-up the partnership, they signed a Limited Liability Partnership Agreement. This LLP agreement, downloaded from the internet, was poorly drafted, and in many respects unsuitable.

Nevertheless, the agreement said that if one partner resigned, then unless another partner was appointed, the limited liability partnership would be wound up.

Our task was to economically dissolve the LLP partnership on terms acceptable to our client. So, our client gave notice to resign. This meant the partnership would be wound up in 6 months unless the partners agreed otherwise.

Legal position

The other partner argued that the limited liability partnership agreement did not require winding up. Moreover, he could appoint a new partner which would allow the partnership to continue. Our client replied that a new member could only be appointed with his agreement. He couldn’t be forced to agree to the appointment.

Therefore, he could block the appointment of a new partner and thus force the winding up. We argued these points and successfully established that our position was correct.

Negotiations

Having achieved the failsafe position of winding up the partnership if we didn’t reach an acceptable deal, we negotiated. We negotiated the term’s of our client’s departure from the partnership, including the split of cash and assets.

The deal more than satisfied our client. Our client created his own business with his capital and all his clients.