When launching a new venture, no one ever imagines that they or their business partner/s may one day wish to leave the organisation. Everyone is fully committed to making the business turn a profit and building a strong reputation.
However, situations inevitably change. In this article, we look at how you can legally dissolve a business partnership if one partner wishes to leave the business.
What it looks like in the beginning
When two or more business partners come together, they generally have the same vision for the business – otherwise, building a partnership wouldn’t make a great deal of sense. It’s also likely that the business partners will be in roughly the same stages of their lives, with the same personal priorities. This will allow business partners to work well together, and grow a prosperous business.
Why things might change
It is likely, as time moves on, that those involved in a business will start to have different (and diverging) priorities. One business partner may have children, and have to take a step back from the day-to-day; the other may want to put all of his or her time into the business and grow it exponentially. This can result in responsibilities falling predominantly on one individual’s shoulders, which may create a very different scenario than was envisaged at the outset of the business.
This is not the only possibility. Business partners may also significantly disagree over the business, or even personal, matters. It may no longer make sense for them to work together. Or one of the business partners may fall ill or die (and, to protect against this, it is highly advisable for businesses to invest in key person insurance).
Whatever the reason, it’s not generally the case that things stay the same forever, and businesses are often forced to adjust and take account of different business visions, and different lifestyles of their founders.
The Partnership Agreement
If you have read our previous articles you will understand the importance of having a Partnership Agreement in place. A well-drafted agreement will set out what happens if one partner wishes to exit the partnership or has to leave due to incapacitation or death.
When it comes to dissolution a Partnership Agreement will usually set out:
- who is liable for the debts of the partnership
- which partner or partners will take over the business
- how any intellectual property will be assigned
- who is responsible for the performance of existing contracts
- how the resigning partner will be paid out
- how assets will be distributed
Dissolving a partnership where there is no Partnership Agreement
If you don’t have a Partnership Agreement in place the Partnership Act 1890 (the Act) will govern how your partnership is dissolved and the consequences of its dissolution.
Under the Act, a partnership will automatically dissolve if one of the below situations occurs:
- a partner dies or becomes bankrupt;
- the Court makes an order to dissolve the partnership;
- the business of the partnership becomes illegal;
- the partnership was created for a pre-agreed fixed term and that term has expired;
- the partnership was created to do a specific thing or achieve a goal, and the project is complete; or
- a partner provides the other partners with notice that they want to dissolve the partnership.
In the last-mentioned situation, the partnership is dissolved from the date specified in the notice as the date of dissolution, or, if no date is so mentioned, from the date the notice was communicated to the other partners.
Due to the ruinous effect such arbitrary action can have on a business, almost all Partnership Agreements prohibit the ability of one partner to dissolve the partnership by merely giving notice.
When can the Court order the dissolution of a partnership?
An application for an order for dissolution under section 35 of the Act may be made by one or more partners.
Under the Act, the Court can order a partnership to be dissolved if:
- one partner becomes incapacitated
- one partner becomes permanently incapable of performing their part of the partnership contract
- one partner’s conduct is calculated as prejudicing the continuation of the business
- one partner persistently or wilfully breaches the partnership agreement or conducts themselves in matters relating to the partnership business the other partners cannot be reasonably expected to remain in partnership with them
- the business can only be continued at a loss
it is just and equitable to dissolve the partnership
How can I remove a partner from the business?
Expelling a partner from a partnership is not easy. If your Partnership Agreement does not provide a procedure for dismissing a partner the only way to remove a partner is:
- by negotiating their resignation from the partnership (this will normally result in the leaving partner receiving a financial settlement)
dissolving the existing partnership and forming a new one
Get legal assistance from LawBite
The dissolution of a partnership does not have to automatically result in business being wound up. However, without a comprehensive Partnership Agreement in place, there is a risk that the resignation, death or incapacity of a partner could see the business fold. To avoid such an event, speak to one of our commercial solicitors about the consequences of dissolving a partnership and/or creating a Partnership Agreement.
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