How to Get Rid of a Problem Partner or Member

The reasons for expelling or getting rid of a difficult partner/member can be many and various; breaches of the partnership agreement, financial mismanagement, breaches of fiduciary duties, persistent failure to co-operate, personal misconduct, lack of contribution, bankruptcy and many more. Whatever the circumstances it is both desirable and necessary to get rid of a partner/member if they are holding back the business or even actively working against it.

Is there a Partnership Agreement?

In both general partnerships and LLP’s, if you don’t have a Partnership Agreement or there is a Partnership Agreement, but it doesn’t include clauses specifically relating to the grounds and process for an expulsion, the offending partner/member cannot be lawfully expelled from the business.

According to Section 25 of the Partnership Act 1890, a partner cannot be expelled, even by a majority vote, unless an express agreement among the partners grants this power. Similarly, Part VI, Section 8 of the Limited Liability Partnerships Regulations 2001 (LLPR 2001) applies the same rule for LLPs. To read the full version of the Partnership Act click HERE and for the full version for the LLP Regulations click HERE

We write about what do if you don’t have a Partnership Agreement at the end of this article.

What does the Partnership Agreement say?

If you do have a Partnership Agreement, start by checking there are clauses that allow for expulsion. If there are, that’s great. Read them thoroughly and proceed with care to ensure you comply with the Partnership Agreement and the supporting law in this area.

Below we will set out the matters to be wary of.

Partner/Member expelled without a good reason

A common challenge to the validity of an expulsion is to argue that the reasons given are incorrect or not properly set out. For example, if you would like to expel a partner/member because of a breach of the Partnership Agreement, you must have clear evidence that the breach took place. It must also be obvious what the breach is and that your reason for expelling the partner/member isn’t based on a tenuous interpretation of the document.

If the offending partner/member can successfully argue otherwise and obtain a favourable decision from the court the expulsion will be set aside.

Procedure for expulsion not followed

If you’re lucky enough to have expulsion clauses in your Partnership Agreement, you must comply with the procedures they set out, to the letter. If an offending partner/member can show that proper procedures were not followed, that is likely to be sufficient grounds to overturn the exclusion.

Violating rules of natural justice

“Natural justice” in the context of expelling a misbehaving partner/member is a reference to the common law principles of natural justice and procedural fairness, summarised in the case of AMEC Capital Projects Ltd v Whitefriars City Estates Ltd

In summary these principles are as follows:

To avoid a successful challenge from the offending partner/member to their expulsion, you should provide an opportunity for them to address the Partnership or LLP prior to the decision being finalised.

You must also give the offending partner/member the right to “an unbiased tribunal”. That means that someone outside of and independent to the partnership/LLP should be appointed to give a decision on the fairness/validity of the decision to expel the partner/member if they ask for it.

Partnership/LLP acting in Good Fatih

In general partnerships, partners owe each other a duty of good faith. If a partner can prove that they were expelled for reasons that were not based on this duty of good faith they will be able to successfully challenge their expulsion.

Actions that may be considered contrary to this duty of good faith include any motivated by gender, racial and other discrimination and/or those based on personal vendettas. It is possible that any action may be considered contrary to the duty of good faith. Such a determination will be based on the facts of each case.

In LLP’s actions contrary to the duty of good faith are characterised as either dishonest, deceitful, or conducted with ulterior motives that go against the principles of fairness and integrity that are expected within an LLP. An action that is taken in good faith is one that benefits the LLP as a whole. To look at it another way, “Bad faith” actions prioritise personal interests or vendettas over the collective welfare of the business.

In the case of Moody v The Estate of the late Norman Jones, the court found that an expulsion notice has been issued by one partner to get in the way of the other partner obtaining information about the day to day running of the partnership.

The court’s decision in Moody indicates that if you wish to enforce an expulsion or compulsory retirement you must show that it is being done for the good of the partnership or LLP and not individual partners/member, otherwise it will be overturned.

Arbitrary Use of Decision-Making Authority towards a member

If a Partnership Agreement allows decision-makers to use their own discretion when expelling a partner/member, to avoid a challenge to a decision to expel you must show that the discretion was exercised based only on issues relevant to the expulsion and the decision to expel the partner/member was a reasonable one that can be defended as being rational in the circumstances and not capricious or arbitrary. This principle is rooted in the legal precedent established by Braganza v BP Shipping case, commonly referred to as the Braganza duties.

Discriminatory Practices towards a member

When expelling a partner/member you must also show that the decision was not based on any discriminating factor or else again face a successful challenge.

Under Sections 44 and 45 of the Equality Act 2010, it is unlawful for a firm to discriminate against, victimize, or harass a person by expelling them as a partner or member.

After expulsion of the offending partner/member

The matters that you are most likely to be of concern to you after an offending partner/member has been expelled are ensuring that they do not compete with the partnership or LLP after they have gone and ensuring that they do not take money out of teh partnership or LLP without some account being taken of the need to recover any losses that they may have incurred during their time in the partnership.

Ensuring they do not compete may involve ensuring restrictive covenants are enforced and if necessary, seeking an injunction against them. Read more on injunctions in our article HERE

It will be necessary to value expelled partner’s share and decide on the payment terms, whether it’s a lump sum or instalments. A Syers v Syers order allows the majority partners to buy out the expelled partner at a proper value and for the business to continue. (This does not apply to LLPs)

However, if the offending partner member has caused significant losses care must be taken not to pay the partner/member without the extent of such losses and the chances of recovering them being considered in detail, with regard to recovering losses against expelled partners/members please see our article HERE

If you don’t have a Partnership Agreement

If your partnership or LLP doesn’t have a Partnership Agreement or there is an agreement, but it is silent on the grounds for expulsion, you cannot expel individual partners, even if the remaining partners are unanimous in wanting to do so.

There are two possible ways forward:

The first is to build a case against the offending partner/member with a view to bringing an action against them for recovery of the losses they have caused to the partnership/LLP.

Upon a clear case with good prospects of success being put together, the offending partner can be approached with a view to resigning from the partnership/LLP on terms that include a settlement of the claim for damages against them.

Please see our article on recovering losses from partners/members How to Recover Losses from a Rogue Partner or Member in a General Partnership or Limited Liability Partnership (LLP)

The second option is to move towards dissolution of the partnership or winding up of the LLP.

Please consider our article on dissolution of a partnership HERE. and winding up an LLP HERE

Finally

By understanding these options, you can make informed decisions about the best course of action to address the exclusion, legal guidance is essential to navigate these complex legal waters and achieve a favourable outcome.

If you would like to challenge being excluded from a partnership or an LLP, please book a meeting to speak to us by clicking on the button on this page or here

Alternatively, please contact us by email or telephone. Our contact details are here

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