Jan 23

I hate my business partner – what can I legally do?

Written by Jonathan Mortimer
Partner

DDI: 01423 726608
M: 07850 993952
E: jonathan.mortimer@raworths.co.uk

Business partnerships are like any other relationship.  There needs to be trust, commitment, an understanding as to respective roles and a shared vision.

Unfortunately, business relationships can fall apart just like personal relationships.

Disagreements within a partnership need to be handled with care, particularly where they have the potential to cause disruption to the business. Every partner needs to lay their cards on the table, outline where they stand, and be clear about what it is they want to achieve.

Sensible and pragmatic discussions then need to be had to determine whether the partnership can survive.  If not, you will have to determine whether the best option would be for certain partners to leave while the others continue, or for the partnership as a whole to be even dissolved.

There are only two ways in which a partner can be removed from a partnership or an LLP.  The first is through resignation and the second is through an involuntary departure, forced by the other partners in accordance with the terms of a partnership agreement.

Where no partnership agreement exists, or where no power of expulsion is conferred, a forced departure cannot be effected. In these circumstances, the only options will be to try to persuade the partner you are having difficulty with to leave, or else to bite the bullet and have the partnership dissolved so that you can cut your losses and start again.

Voluntary departure

 Persuading a partner to exit a business arrangement which is no longer working can be relatively easy where relations remain amicable and there is broad agreement that it is in everyone’s interests for a deal to be done. However, it can be much harder to achieve where distrust has begun to creep in and where the problematic partner is reluctant to go.

There will be numerous issues to consider such as:

• the outgoing partner’s obligations under post-exit restrictions;
• their continuing liability under personal guarantees or say a commercial lease; and
• their right to bring a breach of contract, unfair dismissal or discrimination claim.

Some form of settlement can normally be agreed through written communications, face-to-face meetings or via an independent mediation process.

Partnership dissolution as a last resort

Where an agreed exit cannot be secured, thought will need to be given as to whether the partnership should be dissolved and how this can be achieved.

Depending on the circumstances there may be several options, including:

• invoking a dissolution clause within your partnership agreement, if available;
• serving a notice of dissolution where it can establish that the partnership is a partnership ‘at will’, that is one that is open-ended, not operated as an LLP and not covered by a partnership agreement;
• applying to the court for a dissolution order on the grounds that this is just and equitable, for example because a partner’s behaviour has become so intolerable that it is not reasonably practicable to continue to work with them; or
• persuading all partners that a dissolution is the best way to proceed and thereby procuring their agreement to take this step by mutual consent.

The following will also frequently need to be considered:

• how each partner’s share in the business will be valued;
• respective liabilities for ongoing debts;
• the status and enforceability of personal guarantees and indemnities;
• the right to continue to use the partnership’s name or brand;
• any restrictions on the establishment of a successor business;
• what happens to the partnership’s suppliers and customers;
• what happens to the partnership’s confidential information and intellectual property;
• how the partnership’s final accounts should be dealt with; and
• how settlement of the partners’ affairs should be structured in order to maximise tax efficiency, particularly from a capital gains and inheritance tax perspective.

Partnership disputes can arise for a variety of reasons and are on the increase due to the stresses and strains being put on business relationships by the present economic conditions.  Tackling them head on, and at an early stage, can greatly increase the chances of everyone involved achieving a good outcome.

How to contact our Dispute Resolution solicitors

To find out more, please contact Jonathan Mortimer, a partner in the Dispute Resolution team at Raworths via email at jonathan.mortimer@raworths.co.uk

Raworths is based in Harrogate, North Yorkshire.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

Published on 31 January 2023