Can you take the Spanner out of the works?
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.
Previous articles discussed the need for a written partnership agreement and the reliance on The Partnership Act 1890, which includes many surprising rules. However, if you don’t make a written agreement you may be stuck with them. This article looks at whether the Act allows Nut and Bolt to throw Spanner out of the partnership and carry on without him.
The Act positively says no majority of the partners can expel any partner unless there has been an express agreement allowing them to do this. It does not matter how badly that partner has behaved, the others have no right to throw him out. He has a right to continue as a partner and to continue to share profits for as long as the partnership continues. Most written partnership agreements include a right for a partner to be expelled in defined circumstances without bringing the business to an end.
Spanner has been up to all sorts of mischief. There is no doubt that he has misbehaved very badly. He cannot be expelled and, as we saw previously, he must be allowed to take part in the management of the company.
In reality, very few business have read the Partnership Act and they will in fact exclude Spanner, saying words to the effect that “You are out; what are you going to do about it?”
Once again, Spanner has the right to complain to Court. He might not deserve much sympathy, but there may be difficult issues to decide.
As before, when I looked at suspension, there are cases when the suspicion of wrong-doing is hazy, even after an investigation. It might just be a convenient excuse to get rid of someone so the others can enjoy greater profits. An innocent individual in Spanner’s position would have a strong case in court. It would usually include claim for the return of money invested in the business and profits that have been earned up to the date of expulsion. In addition the claim can cover profits that have been earned while the partnership continued. In this case the partnership had at least three years left to run so if Spanner had been wrongly expelled then he would have a claim for three years’ profits.
Spanner is not an innocent individual, but he might try to make these claims. He may take the view that, “Yes, I did break a few rules, but I was nothing like as bad as they claim and I put a lot of money into that business, which they are keeping.” Nut and Bolt may have to prove their reasons for acting as they did. They may make counter claims for the losses that they have suffered as a result of Spanner’s misconduct, £60,000- if they can prove it. They may argue that Spanner will lose nothing in future, because he has already set up a new business, “Spanner in the Works”, that is making as much profit as he would have gained from the partnership. There will be many points to dispute and I will look at some of them in more detail in later articles.
Even a well-drafted agreement will never solve all of these issues, there are just too many possibilities, but it will set out rules to apply when a partner is expelled and this will at least make the picture clearer, cut out some disagreements and make it easier to reach an overall deal without fighting it out in court.
This article has looked at expelling a partner when the business carries on. However, that is not what the Act sees as the usual picture. I shall look at this next time.
* Please note, this is a fictional business for illustrative purposes only
Stephen Allen, partner