What do complaining partners have to prove?
This is the sixth article in a series which covers 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 problem of expelling a partner from a partnership at will and the danger that the whole partnership can be dissolved. In our case however, Nut, Bolt and Spanner have a fixed term agreement with two years to run. No one partner can simply determine the partnership and no majority can expel a partner.
So, what can Nut and Bolt do?
The Partnership Act provides plenty of options to seek compensation and we will look at them later. However, that’s not what Nut and Bolt want, at least not all they want. If there had been just one dodgy incident, then repayment of a few pounds, or an adjustment to the accounts, and a frank chat to clear the air could have been enough to repair the relationship, but it’s too late for that now; they want him out.
Where there is a fixed term partnership, the Act says a partner may apply to court to dissolve the partnership. As we have seen, dissolution is not what they want, but the very process of going to court gives an opportunity to force a negotiated solution; it’s better than having lawyers fight over your future in court. Nut and Bolt may need to start the ball rolling to get Spanner to talk realistic terms. It is a roundabout solution, and probably not what Parliament intended, but it is what usually happens.
What do Nut and Bolt, as the complaining partners, have to prove? There are three possibilities.
First, a partner, other than the one making the application, has been guilty of misconduct which materially prejudices the business. This may depend on the nature of the business.
This applies to misconduct outside the normal scope of work. For example, if your partner has been convicted of murder it will certainly prejudice your business (as well as the deceased). A speeding ticket would not normally have this effect. However, it might if you are running a driving school and the story made a splash on the local news.
In our case the misconduct is directly related to the business.
Second, a partner, other than the one suing, “wilfully and persistently” breaches the partnership agreement, or otherwise conducts himself on matters relating to the partnership business that it is “not reasonably practicable to carry on business in partnership with him”.
Nut and Bolt can use this. There is no written partnership agreement, but there is certainly an agreement, as we saw in an earlier article. Spanner has flagrantly breached the agreement. He has caused losses to Nut and Bolt and, worse, he has been underhand and dishonest over a long time. This deliberate dishonesty has fatally damaged the relationship. Nut and Bolt can never trust Spanner again, so it is not reasonably practicable to carry on in business.
This assumes that Nut and Bolt will be able to prove the terms of the agreement and the breaches, which can be tricky. Nut and Bolt may also want to use the next option to make sure they get their result.
The third option is that circumstances have arisen making it just that the partnership should be dissolved.
This covers any circumstances, not just misconduct. It could simply be that the partners just do not get on any more. Families in partnership may fall out for hundreds of reasons; maybe Granddad left money to your sister, but not you. If partners can’t talk to each other without fighting then they cannot do business and it is better for the business to dissolve.
This option is interesting as it allows Spanner to apply, even though he was guilty of misconduct. This option does not include the words “misconduct” or “other than the partner who is suing”. He might argue that Nut and Bolt have over-reacted to a minor misunderstanding and now they are sending him to Coventry. The court would be very wary of dissolving a partnership on the application of the wrong-doer, but it is possible.
The court can and will dissolve a partnership where misconduct leading to a breakdown is six of one and half a dozen of the other. Nut and Bolt may want to use this option as a fall back. If there is a dispute over exactly what terms were agreed, it may be easier to simply prove that the relationship between partners has completely broken down, so the partnership should be dissolved.
Going to court is time consuming and expensive. Nut and Bolt may prefer to look at other ways to force Spanner out. I will look at these in my next article.
Stephen Allen, partner