You are the Judge – partnership disputes

 

Running a business is a complicated matter even when everything is going smoothly. So what happens if you have a partnership, and you have to make a serious decision about one of your partners? What are the implications?

Partnership disputes image

The scenario

In 2010 Alex, Rupert and David formed ARD Associates, a political consultancy which they run as a partnership.

In 2012 at a networking event, Rupert made some unguarded disparaging comments about one of their biggest clients, the Devine Corporation. Unfortunately, he was overheard by the husband of Devine’s Managing Director, and this has led to a serious falling out.

In order to preserve the business, Alex and David decided to fire Rupert. They called him into a meeting, explained the circumstances in detail and asked him to leave. Rupert refused, saying that he had worked hard for the business over the years and was not going to give up everything he earned just because they might lose a big client.

Alex and David ignored him, changed the locks on the premises and carried on the business without Rupert. He has now brought them to court.

What can be done? What is the likely outcome in this partnership dispute situation?

The answer

In the absence of a partnership agreement, Alex and David were not empowered to expel Rupert.

S.25 of the Partnership Act 1890 (which still governs English partnership law) is very clear on this point. Rupert is still a partner, and accordingly entitled to an equal share of the business’s profits since his purported expulsion, irrespective of the fact that he has done no work since then.

A court will order this to be paid.

There remains the question as to what Alex and David should do. They cannot fire Rupert and he is unlikely to agree to a new partnership agreement that allows him to be expelled.

The only complete solution open to them is to dissolve the partnership and set up a new one on their own. This will mean paying their creditors and allowing Rupert to take 1/3rd of the firm’s assets.

The vital importance of a valid partnership agreement is made abundantly clear by this scenario! Make sure you and your business are protected.

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