Dissolution of a Partnership

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Dissolving a business partnership is always complex, more so if the partners are in dispute. We guide you through the process and how to preserve value.

We mainly support professional service partnerships, e.g. solicitors, vets, architects, accountants and surveyors but can assist with any type of business partnership termination. We are often instructed on a neutral basis to advise on the best legal and tax solutions for all the business owners.

In situations where the partners are not on good terms or where an individual partner wants their won legal advice, we are experienced in finding the best practical solutions that avoid expensive litigation.

How to dissolve a partnership

There are 5 main ways to dissolve a partnership legally :

1. By agreement

Most partnership agreements will include clauses and procedures for the partnership to 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  limited 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 2 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 negotiations

Negotiating to dissolve a partnership is often the best way. Often the business 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.

Partnership dissolution agreement

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

If a 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.

Removing a partner from the business

It is often difficult to remove a partner. Often in a partnership that comprises at least 3 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.

plied the law.