When business relations break down, the most straightforward solution is to remove the partner in question and continue business operations without them. However, the expulsion of a partner under English law is a meticulous process, where not adhering to the legal requirements may expose the remaining partner(s) to significant consequences and liability.
The Partnership Act 1890
Many partnerships operate without a written partnership agreement, and in the absence of one, partnerships are automatically governed by the Partnership Act 1890. Under section 25 of the Partnership Act 1890, a majority of partners cannot expel another partner unless the partnership agreement expressly gives them that power. A partner cannot be removed simply because the others consider them disruptive, dishonest or unproductive, or believe that expulsion would be fair or in the partnership’s best interests.
In situations where an express clause is absent, the only remedy available is the dissolution of the partnership.
Dissolution
In most cases, dissolution to remove a partner is considered disproportionate, and often commercially damaging. This implies winding up commercial affairs and dividing all assets and accounts amongst partners, even when other partners wish to continue the operation of the business. This can put current and future business prospects and client relationships at risk due to the perceived instability of the partnership. Any business must be put on hold and can only start again once a new partnership is formed; this is likely to be unfavourable to performance targets and agreed timelines and put the partnership’s integrity and business reputation in jeopardy.
Express Clause: Drafting
Even where a partnership agreement contains an express clause dealing with expulsion, the way it is drafted may affect the process and outcome. Here are some terms that strong, well-drafted agreements typically include:
- The grounds for expulsion: for example, a serious breach of the partnership agreement, prejudicial conduct to the business, incapacity to be a partner, or bankruptcy of a partner
- Mechanism for decision-making: whether expulsion requires unanimous agreement or a majority vote amongst the remaining partners.
- Good faith: express power of expulsion must be exercised in good faith (in the best interests of the partnership) and not as a means of taking another partner’s share of profits or power over the business for any improper purposes.
- Procedural fairness: for example, notice periods and a chance for the partner facing expulsion to be heard and provide a defence before a final decision.
Fiduciary Duties
Disputes surrounding the expulsion of a partner are rarely isolated incidents or occasions, and frequently come with allegations of a partner breaching fiduciary duties or not performing the duties and responsibilities of a partner, such as:
- Diversion of business opportunities
- Competing with the firm
- Failing to disclose conflicts of interest
In these circumstances, the partner’s conduct may be investigated, and an account of any profits may be required, either before or alongside the expulsion process. The findings may then provide grounds for expulsion, where the partnership agreement permits it.
If you require legal assistance or advice with a partnership dispute, please contact Nath Solicitors on 0203 983 8278 or get in touch with the firm online.