How to Challenge Being Wrongfully Excluded from a Partnership or a Limited Liability Partnership (LLP)

If you have been excluded as a partner or member of a general partnership or LLP, this article sets out what you need to know to challenge the exclusion and the remedies available to you. There are several ways to challenge expulsion. These are as follows:

No Express Provision in the Partnership Agreement

In general partnerships and LLPs, the expulsion of partners or members requires an express provision in the partnership agreement.

Section 25 of the Partnership Act 1890 specifies that 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 Limited Liability Partnerships Regulations 2001 (LLPR 2001) adopts this principle for LLPs as well.

Put simply, in both general partnerships and LLP’s if there isn’t a partnership agreement in place or there is a partnership agreement but it doesn’t include an express provision regarding expulsion of members, you cannot lawfully be expelled from the business.

No Sound Reason to Expel a member

A common challenge to the validity of an expulsion is to show that the cited grounds are unfounded. If for example, the expulsion is based on an alleged breach of the partnership agreement and further examination, investigation or even a court action shows no such breach took place, the expulsion will be considered ineffective or void. This determination primarily involves interpreting the grounds for expulsion and examining the actual events.

Procedure for Expulsion not followed

Many partnership or LLP agreements with expulsion or compulsory retirement clauses also outline a specific procedure to be followed. These exit clauses must be strictly complied with. To prove that the appropriate procedure set out in the partnership agreement has not been followed, is a strong ground for challenging your exclusion.

Violating rules of natural justice towards a member

When we refer to natural justice here, we mean the common law principles of natural justice and procedural fairness, summarised by the Court of Appeal in the case of AMEC Capital Projects Ltd v Whitefriars City Estates Ltd1 (Please note, although the principles in that case apply to expulsion of partners, the facts of that case relate to a different kind of dispute).

The principles are as follows:

First, the person affected has the right to prior notice and an effective opportunity to make representations before a decision is made.

Secondly, the person affected has the right to an unbiased tribunal.

Recent cases have provided further support to the application of this natural justice principle. In Eaton v Caulfield1 the court cited the AMEC principles. Applying them to an expulsion from an LLP, the court expressed the view that ‘There was no prior notice or opportunity to make representations before an unbiased tribunal’ explaining further, that there was no justification for a ‘summary dismissal’.

So relying on the AMEC Capital Projects Ltd v Whitefriars City Estates Ltd principles, if you have been expelled as a member and were not informed of the decision before it was implemented and not allowed to present your side of the case to an unbiased tribunal, you may well have a case to challenge your expulsion on the basis of natural justice.

Good Faith/Bad Faith

In general partnerships, partners owe each other a duty of good faith. If you believe that your expulsion was not carried out in good faith, i.e. done in bad faith, this can be another ground for challenging the expulsion. Bad faith actions include those motivated by gender, racial and other discrimination and/or those based on personal vendettas. It is possible for any actions to be contrary to the duty of good faith. Whether they are or not, usually requires detailed investigation.

In the context of the expulsion of a member in an LLP, “bad faith” is characterised by actions that are dishonest, deceitful, or conducted with ulterior motives that go against the principles of fairness and integrity expected within the business structure. Such actions are to be considered in contrast to actions taken in good faith, which aim to benefit the LLP as a whole. Bad faith actions prioritise personal interests or vendettas over the collective welfare of the partnership.

In the case of Moody v The Estate of the late Norman Jones, the court referenced Blisset v Daniel and determined that one partner had issued an expulsion notice for an impermissible collateral purpose. Specifically, this was done to hinder the other partner’s efforts to obtain information related to the day-to-day operations of the partnership.

The court emphasised that, as part of a partner’s duty to act in good faith, serving an expulsion notice must be done bona fide for the benefit of the firm as a whole, not for the serving partner’s personal benefit. The court’s decision in Moody clearly indicates that any expulsion or compulsory retirement will be invalidated if it is found to have been executed in bad faith. This case highlights that courts are keen to ensure that expulsion powers are not abused for individual gain and the principles of fairness and integrity within partnerships are indeed protected.

Arbitrary Use of Decision-Making Authority towards a member

When a partnership agreement grants a decision-maker a discretionary power, it is implied that this discretion must be exercised in a rational, non-capricious, and non-arbitrary manner. This principle is rooted in the legal precedent established by Braganza v BP Shipping, commonly referred to as the Braganza duties.

When applying this to the expulsion of a member/partner, you must first ascertain that it is a discretionary power that is being exercised and then apply the Braganza duties, which is a two-limb test.

The process limb, which examines whether decision-makers improperly considered irrelevant factors or neglected relevant ones and the outcome limb, which assesses whether the resulting decision is so unreasonable that no rational decision-maker could have reached it.

Discriminatory Practices towards a member

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. Therefore, an expulsion which was influenced by discriminatory factors or considerations, cannot be sustained.

What Are Your options for remedies as an excluded partner?

Seeking a Judicial Declaration as a Remedy

If you can prove that your expulsion was wrongful or unjustified, one of the most effective remedies is to seek a declaration from the court that the removal was void. This approach is often preferred over pursuing claims for damages or equitable compensation. The rationale behind this strategy is that the expulsion breached the agreement and a proper decision regarding the expulsion was never made in the first place.

Such a declaration, means that you were never actually removed from your position. Entitlement to your share of profits and other associated benefits for the wrongful exclusion period will therefore apply. As resuming your position is unlikely to be practicable, this will put you in a potentially stronger position to negotiate an exit from the partnership/LLP, that is to your advantage.

Pursuing Dissolution

In some cases, being that the cornerstone of the partnership arrangement is a trust relationship, where the relationship between partners or members has irretrievably broken down and no agreement can be reached, you or the other partners may apply to the court for dissolution whilst safeguarding your losses as well.

– Dissolution of Partnership: Under section 35 of the Partnership Act 1890, you can apply to the court for the dissolution of the partnership if the relationship has completely broken down.

– Winding Up of LLP: Similarly, the court may exercise its power under section 122(1)(e) of the Insolvency Act 1986 to wind up the LLP on just and equitable grounds, based on a complete breakdown in relations.

Such a dissolution application can also contain a request for an appropriate dissolution order which will include an order for damages arising from the termination, for the loss of reputation and any other damages that can be established, if you can prove a breach of good faith on the part of his co-partners and losses for career disruption.

In Mullins v Laughton the court ordered that part of the dissolution account should be made for the losses of the expelled partner, without the issue of damages against partners having to be determined any further.

Syers v Syers

To avoid the drastic effects of dissolution or winding up, the court might consider a Syers v Syers order for general partnerships. This order allows the majority partner to buy out the expelled partner at a proper value, enabling the business to continue as a going concern, rather than having its assets sold and proceeds divided. It is important to note that Syers v Syers orders apply to general partnerships and not LLPs.

Finally

By understanding these options, you can make informed decisions about the best course of action to address your wrongful exclusion. Whether you aim to rejoin the partnership, seek damages, or pursue dissolution, 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

Whichever method you choose to get in touch, it’s a chance to speak to a specialist litigation solicitor, without charge or obligation.