A partnership is a way in which two or more people can run a business. With a partnership, all partners are jointly and severally liable for business liabilities. There must be at least two partners but there can be more. Formation and start up can be very informal but it is always advisable to get a partnership agreement drawn up. The partnership agreement should set out, amongst other things, who owns what proportion of the partnership, how profits are to be shared and in what proportions, how a partner or partners can be added, and how a partner may be removed.
In terms of legal liability, a claim can usually be brought against one or all of the partners individually or collectively. Decision making can be collective or delegated but again should be set out in the partnership agreement. Any rights to the ownership and distribution of things like assets and intellectual property should also be set out in the agreement. The partnership’s business affairs and things like tax, accounts, profits and losses are a private matter and not open to public scrutiny.
Dissolution is the term for when a partnership is brought to an end. When this occurs because one partner leaves (i.e. by expulsion, death, retirement or bankruptcy) the other partners may wish to continue in business together and will need to negotiate for the purchase of the outgoing partner's share. Ideally the partnership agreement should contain such provisions and fix the terms of the purchase. Unless the partnership agreement deals with payment for use of the former partner's share in the assets since he/she left, he/she is entitled to interest at 5% per annum on the value of his/her share or such sum as the court may order as representing the share of profits made which is attributable to the use of his/her share.
If agreement cannot be reached regarding purchase of the outgoing partner's share in the business, the business will generally need to be sold. Usually it is financially advantageous to sell the business as a going concern. This is because the goodwill of a successful business will have significant value. If a buyer cannot be found, the business will have to be broken up and the assets sold separately. If necessary, a partner can apply to the court for the business to be wound up and the assets sold. If there is a dispute between the partners, or assets are at risk, a partner can apply to the court for appointment of a Receiver or Manager. The appointee is an officer of the court and can deal with the assets, sell the business and if also a Manager, can run the business.
Following dissolution the Court has the power to order the sale of all of the assets of the partnership (including land) and will usually do so because to do otherwise would or might deprive the former partners from realising the maximum return from the assets of the partnership. This practice is only departed from in two situations:
(a) When a Syers Order is made and
(b) Where the sale of the partnership assets would offend statute or would otherwise be difficult to achieve.
A ‘Syers’ order is where the court orders that the remaining partners can ‘buy out’ the partner threatening dissolution and so carry on the business. Such orders are normally only granted in exceptional circumstances, and as previously stated the usual court order is for the partnership to be full wound up and the assets sold on the open market.
In a recent case the High Court (HC) was asked to decide whether such an order was appropriate. The case involved the dissolution of a farming partnership at will with two equal partners and depart from. As always is the case, the HC considered all the relevant legislation and legal precedents from previous case law, and felt that there were exceptional circumstances justifying a Syers order. These included:
- There had always been an understanding between the partners that partner A would buy out partner B if the partnership ended. As a result of this understanding A dedicated himself to the business, which the HC felt made it unfair for B to insist on a typical winding up and sale. The HC took into account A's individual efforts in developing the partnership business and compared the current state of the business with how it was at the start of the partnership, and the relative efforts (or lack thereof) of B compared to A. As A had relied on the understanding with the other partner the HC felt an order for sale would be unfair and unjust.
- The HC took into account the negative impact a sale might have on third parties, such employees and customers, compared with allowing A to buy B out and continue to run the business.
- The HC considered expert valuation evidence which supported the conclusion that the price payable by A to B under the Syers order was equal to what B could reasonably have expected to receive if the assets were sold on the open market.
As ever, no two cases are the same and case is decided on its own specific facts. This case does demonstrate that the law in this area is complex and nuanced, and legal advice should be sought where appropriate. A well drafted partnership agreement is always a good idea as this can go a long way towards avoiding disputes arising in the first place.