Alternatives to dissolving a partnership
This is the seventh in a series of short articles covering various aspects of disputes between partners. The last article can be found here.
Recap: Nut, Bolt and Spanner* have been trading for a few years reasonably successfully. They have £120,000 tied- up in the business and split profits equally. They have a five year loan agreement which has two years to run. In the last two years turnover has dropped. Nut and Bolt have realised that when a customer calls Spanner says, “Bring it round to my place on Sunday and I’ll charge you £150 cash”. Spanner takes spare parts from the workshop, fits them at “his place” and pockets the proceeds. Nut and Bolt believe he’s cost them £60,000 over two years. They want him out of the partnership and compensation. They have no partnership agreement.
The last article talked about the option of dissolving the partnership by application to the court. This can be expensive and daunting, so Nut and Bolt want to look at other options. This article looks at some of the possibilities.
- Reporting Spanner to the police
It is common for a partner who feels cheated to say “Let’s report this to the police”.
It is undoubtedly true that Spanner has acted dishonestly to obtain a financial benefit at the expense of Nut and Bolt. This might be considered fraud. He has taken the spare parts from the workshop that belonged to the three partners equally and has dishonestly sold them and kept the proceeds as if the parts belonged to him alone. Arguably this is theft. I emphasise that I do not practice criminal law and am not advising on these issues.
My experience is that whenever a client has reported such an issue to the police the almost inevitable reply is, “This is a civil matter, sir”.
The position would be different if there was a partnership between Nut and Bolt, who employed Spanner on a wage. It would be quite clear that Spanner did not own any part of the stores and it would be a clear case of theft from his employers.
- Reporting Spanner to Inland Revenue
The second option would be “I will report him to the Revenue”. Spanner has been doing lots of work for paying customers in his own time and taking cash payments. It is very unlikely that any of this has been included on his tax return. He has probably committed an offence and would certainly owe a lot in unpaid tax. The Revenue might well be interested.
Most businesses, however, are very reluctant to call in the Revenue under any circumstances. “If we blow the whistle on Spanner then he will blow the whistle on us”. There are minor financial irregularities in many businesses, usually as the result of carelessness rather than deliberate dishonesty. It is amazing how someone in Spanner’s position suddenly becomes sanctimonious about his partners’ little failings. Even if Nut and Bolt have nothing to hide, they certainly do not want Revenue officers knocking on their door.
It’s also unlikely to do any good for Nut and Bolt, even if the police or Revenue do investigate Spanner. They are not concerned if the partnership is ended or if Spanner pays compensation. In fact, if Spanner gets a tax bill for several thousand pounds it will make it harder to force him to pay compensation.
Most partners do not report to the police for Revenue.
Sometimes a partner is tempted to threaten that, “If you don’t pay what you owe, I will report you”. I seriously advise that Nut and Bolt do not do this. It is “demanding money with menaces” or blackmail: a criminal offence. They could find themselves in a far deeper trouble than Spanner.
- The big freeze
In the end Nut and Bolt may just try to freeze him out, keep him from the workshop and refuse to speak to him or become abusive.
A sensible approach would be to agree to meet to thrash out an agreement. This might lead to a reasonable resolution or a blazing argument.
It may come back to the lawyers who would then look at court proceedings to secure compensation and dissolution and exert pressure towards a settlement. If that is the line Nut and Bolt take then what defences might Spanner try?
And so this leads nicely into my next article. Look out for article eight next week!
Stephen Allen, partner