Can Your Business Survive A Partnership Dispute

Being in partnership can be a great way to do business: the pooling of capital, talent, skill and common purpose to drive a business to success.

However, as with the best of relationships, things can go wrong. Trust can evaporate as differences in personalities emerge. Ethics, business direction, control issues, underperformance and money woes can dominate partnership meetings, instead of the wellbeing and growth of the business.

Firm foundations

Before setting up or entering into a partnership, take advice from a specialist solicitor.

Their role is to protect your interests and ensure you have a clear picture of your responsibilities, management, expectation and risk. Establishing your legal status can help avoid pitfalls later.  Factors such as capital input, profit share and management powers are all relevant in determining whether you are a true partner or an employee.

Remember, the honeymoon period is soon over. Just as with pre-nuptial agreements, it is better to know where you stand "just in case" and have a tailored partnership agreement for your business.

You do not want to have to dust off the Partnership Act 1890 (which applies in the absence of a bespoke agreement) and which can turn up surprising and unwanted outcomes.

A partnership agreement should be kept under review, and should evolve with the business.

Common problems

Common problems arise around issues such as performance, profit share, withdrawal of capital and contribution of time and resources. However, in most circumstances, you will wish to find a solution and keep the business on track.

Underperformance by one partner can be a stressful issue for all involved, and may be either a temporary problem or a permanent trend. Warning arrangements are helpful in allowing for an 'improvement' period, but take care to follow any agreed exit strategy, so that the arrangements are fair to all.

Older "founder and name" partners may be self-appointed into the senior partner role, and can create problems if they will not move on, at the expense of management, succession and business vision. However, you need to be very careful how succession planning is handled, to avoid a potential claim of age discrimination.

Breaking up

Dissolution of the partnership does not necessarily mean discontinuation of the business. A partnership may end for many reasons: death, bankruptcy, dishonesty, impropriety, absence from the business or misuse of partnership time and assets. All create intentional or non-intentional problems, which may need help in resolution, if the business is to continue.

Dissolution may be the only option, especially if a partner's conduct is prejudicial to the business, or if the partnership can only trade at a loss.  If so, seek advice as to how best to achieve an effective and fair dissolution of the partnership, or, if possible, continuation of the business.

Capital payback

If the business continues, an outgoing partner is entitled to repayment of injected capital, as well as a share of profits and interest attributable to use of partnership assets. Releasing capital can be detrimental to the business and, during times of economic uncertainty, difficult to do. It is important to refer to the agreement for exit clauses, restrictive covenants and the fairness of terms for capital repayment.

Buying out other partners is an option, but, if the parties cannot agree, the court can compel the winding up and sale of the partnership assets and decide entitlement to the proceeds of sale. Beware as, if there is no agreement, the 1890 Act says that everything should be shared equally.

The effect of dissolution

If a partnership has to be dissolved, the implications need to be well thought through, with a cost-benefit analysis to all concerned. The partnership continues only so long "as necessary" to wind up the business, complete transactions "begun but unfinished", discharge liabilities and distribute remaining assets between the partners. This all has important implications when money is at stake, and if the partners are at loggerheads.

Where a partnership has an obligation to complete a contract, and there are no agreed "escape clauses", partners may insist that their co-partners cooperate in completing the contract as part of the winding-up process.

Reconciliation and resolution

If you are currently having problems in partnership, but are not at breaking point, take the opportunity to address the issues, and possibly revise the partnership agreement.

Your solicitor can help to minimise conflict and through discussion and mediation ensure that a new working agreement engenders goodwill and the continuation of the partnership.

Alternative dispute resolution either by way of arbitration or internal or independent mediation is a healthy alternative to the court process, which can become toxic. It can also provide for a greater range of possible solutions, a more cost-effective resolution, and help preserve confidentiality.

Emotion is a valuable "currency" in relationship breakdown, allowing parties to get things off their chest and focus on the financial or commercial terms of resolution.  This can include making concessions, to enable the partnership to continue and thrive or to be dissolved amicably.

To agree to differ may be all that remains of partnership consensus, but it avoids the courts provided you can agree on a way forward. Expert guidance can help you to negotiate amicably, avoiding exacerbating and protracting the situation, and saving costs.

Contact us:

For advice on any business dispute contact our Litigation and Dispute Resolution Department in York 01904 716000 or Wetherby 01937 583210.