The Partnership Act 1890: Help or hindrance?
This is the third article in a series covering the various aspects of disputes between partners. Read article one and two.
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 Partnership Act 1890
Where there is no written agreement we have to fall back on that long standing piece of legislation, The Partnership Act 1890. You would think that a statute that has been around for more than 125 years must be very user-friendly, but it makes many surprising rules. These can be changed by agreement, but if you don’t make a written agreement you may be stuck with them. This article looks at some of those rules.
The Act says that all partners are entitled to share equally in the capital and profits of the business and should contribute equally to losses. In some cases this is exactly what the partners would have intended. However, there are many ways to arrange a business. One partner may put in more capital or have greater experience and therefore assume he is entitled to a greater share of the profits. This should have been spelled out. If he cannot prove that his partners agreed this then he is in trouble. His partners may genuinely remember things differently or they might just lie. The Court can look at any relevant papers, such as letters, emails, texts etc. and this may solve the problem.
In this sort of case, the answer is usually found in the accounts. If the partners have signed off the accounts for the last five years showing that profits have always been divided 40:30:30, then that is very strong evidence that our partner was indeed entitled to a larger share. However, if they fall out in their first year of trading then life can be much more difficult.
It happens that the Act coincides with what Nut, Bolt and Spanner agreed, so we can move on.
The Act gives every partner the right to take part in the management of the business. This is true even if the partners simply cannot talk to each other, or if one partner, Spanner, is accused of gross misconduct and dishonesty. Nut and Bolt might want to suspend him while they investigate properly, but the Act does not allow for this. Spanner is still a partner and has a right to take part in managing the business.
A partnership agreement however will normally give the right to suspend a partner in defined circumstances and spell out what happens during this time.
There may be cases when the suspicion of wrong-doing is not clear-cut or where a partner is ignored for no good reason; perhaps the others want to make quick decisions that they know will be opposed. It may be the start of a campaign to force someone out so the others can enjoy a greater share of the profit. An individual in Spanner’s position would have a valid complaint in court.
Of course, if Spanner really has been guilty of gross misconduct then he may not get much sympathy in court if he complains about being excluded from management while it was investigated. In reality partners often are suspended in effect, just because the others refuse to deal with them and a wrong-doer won’t dare enforce his rights. There are no set rules as to what happens in these cases- there is simply an uncomfortable stand-off. This is what is likely to happen to Spanner in our case.
In the short term this is probably what Nut and Bolt would have wanted, so, up to a point justice might be done, almost by accident. However, Nut and Bolt want to get rid of Spanner completely, not just suspend him. I will look at this in the next article.
If you would like to discuss any issues you have regarding your business or partnership agreements then please call me on 01752 203500 or email Stephen.allen@GAsolicitors.com.
* Please note, this is a fictional business for illustrative purposes only
Stephen Allen, partner