Can You Use the Dissolution of a Partnership to Get Rid of a Dishonest or Failing Partner and Recover Your Losses from Them?

Yes you can. If one of the partners is acting against the interests of the partnership; acting dishonestly, causing loss to the partnership, etc. the law allows you to dissolve the partnership and during the dissolution process, claim back the losses caused by the offending partner.

Under the Partnership Act 1890 (the Act), a court has the power to dissolve a partnership in certain circumstances, even if the partnership remains profitable. Section 35 of the Act sets out certain situations where the court may decide to dissolve a partnership. The relevant clauses of Section 35 of the Act and their effect are set out below. To access the full Act, click the link HERE

(c) When a partner, other than the partner suing, has been guilty of such conduct as, in the opinion of the Court, regard being had to the nature of the business, is calculated to prejudicially affect the carrying on of the business.

The “conduct” usually considered under this section is the type of behaviour that might cause reputational damage to the partnership. For example, a conviction for an offence involving dishonesty.

In the case of Carmichael v. Evans. [1904 C. 186.] [1904] 1 Ch. 486, a junior partner, expelled from his partnership for having been convicted of travelling without a ticket on the London to Brighton train line, failed in his action to have the expulsion overturned. It seems unlikely that today such heinous behaviour could be relied on as grounds for expulsion but clearly partners are to be held to a higher standard of conduct than others.

(d) When a partner, other than the partner suing, willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with him

If you rely on this clause, the court will be looking for an irretrievable breakdown in the relations between the partners rather than a minor dispute.

However, if relatively small matters are consistently repeated, arguably showing a persistent lack of co-operation, that may be sufficient.

The possible causes of a breakdown in the relationship between the partners are innumerable; failure to carry out duties, taking money in breach of agreements, competing with the business through another entity, The significance of proving the cause of the breakdown, whatever it is, will be in showing that the relationship is indeed beyond repair.

(f) Whenever in any case circumstances have arisen which, in the opinion of the Court, render it just and equitable that the partnership be dissolved.

This provision overlaps with the “not reasonably practicable… to carry on…” test in Section 35(d) and to some extent can be considered a “catch all” provision. There are no set requirements for the court to exercise its powers under this provision, though we suggest proving one of the following will be helpful in obtaining an order for dissolution of the partnership.

What do You Need to Prove?

Breach of mutual confidence

Courts have highlighted that trust among partners is crucial for a partnership to work well. If you can show that this trust is completely broken, it can be a good reason to dissolve the partnership under the “just and equitable” clause.

Exclusion from Management

The courts understand that partners expect to help manage the business. If you can show that you’ve been shut out from managing the partnership, this can be a reason to dissolve it.

Breach of fiduciary duties

Partners have a duty to act in good faith towards each other and the partnership, along with fiduciary duties. Breaking these duties can be a reason to dissolve the partnership. Examples of breaking these duties include keeping business opportunities to yourself instead of sharing them with the partnership, taking out too much money, and other similar actions.

How does the Court deal with Damages Claims against a Breaching Partner?

Once the amount owed to the partnership by the offending partner has been proved, the extent of the debt, possibly with the help of a court order for the partner to provide an account, will be determined. The court will then consider what measures are needed to recover the monies.

Such steps may include ordering the liquidation of the breaching partner’s share in the partnership or the sale of other assets owned by them. The court’s goal is to find a fair solution that looks after the interests of the partners who have acted lawfully, while also making sure the partnership’s debts and obligations are taken care of.

An examination of the partnership agreement for any clauses relating to breaches of fiduciary duty and dissolution procedures will also shape the court’s decision. The court will enforce the rights and obligations outlined in a partnership agreement.

In the absence of clear guidance from the partnership agreement, the court will rely on the following provisions of the Partnership Act:

Section 29 (1) states, “Every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership, or from any use by him of the partnership property name or business connexion.” We hope this is self-explanatory (even with Edwardian spelling).

Section 30 requires a partner carrying on business of the same nature or competing with the firm, to account and pay over all profits made by him in the other business

In short, the court’s aim is always to resolve the matter in a way that upholds the integrity of the partnership and protects the interests of the non-breaching partners.

After a Court Orders Dissolution

When a court orders the dissolution of a partnership in circumstances where one or more of the partners is found to owe a debt to the others, the court order winding up the partnership will require the partners to settle its affairs in full, including paying off debts, selling partnership assets and most importantly for our purposes, ensuring any payments arising from an offending partner’s misconduct are made.

After this, any remaining assets are distributed among the partners. Whilst upon dissolution, the offending partner is typically entitled to their share of the partnership’s profits up to the date of dissolution, if the court finds that the partner breached fiduciary duties or acted against the partnership’s interests, the necessary adjustments will be made. The winding-up process is governed by Section 39 of the Partnership Act 1890.

After dissolution the partners are free to set up business either as a partnership, LLP or company. There are practical considerations though, most obviously maintaining business continuity. If they choose to re-establish the business as a general partnership, a new partnership agreement will need to be concluded.

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Let’s Talk

If you think you have a similar issue with a partner please talk to us. We would be happy to discuss your specific circumstances and give an initial assessment. Contact us by using the Book a Meeting button on this page or contact us by phone or email. Our details are at the top of this page and HERE.