 Dissolution of Partnerships
 Hugh Ellins The break up of a business partnership can be as painful as a divorce of a married couple. We have recently concluded a partnership dissolution which took over four years to resolve.
The facts are that our client went into partnership with her son-in-law (in this article called Fred). Perhaps because of the relationship the partnership documentation was not properly thought through when it was signed.
From an early time the partnership did not work primarily because Fred did not carry out the work that he had undertaken to do on behalf of the partnership. Eventually our client instructed us and we advised her on what she might expect to receive and how she could achieve her objectives. The advice was unpalatable because despite Fred not pulling his weight in the partnership, he was still entitled to receive his share of the profits - one half. The situation was made more difficult because the main asset of the partnership was also the home of our client. That fact actually made more difficult decisions based purely on partnership law.
Those advising Fred also claimed that he was entitled to receive one half of the value of the business after the partners had taken into account their unequal capital shares. These claims were denied and following the advice of one the country's leading barristers on partnership, Mr Blackett-Ord, we successfully established that the value of the business should be divided in proportion to the capital input made by the parties. Ultimately the partnership was dissolved and as part of the dissolution, our client acquired the business and the property from which it ran.
From these brief facts, can be drawn various interesting points. Firstly, why did it take so long to bring the matter to a conclusion? Initially there was a protracted period of negotiation which failed because of the excessive demands of Fred. Subsequently, once the decision was made to go to Court, Fred's strategy was to cause delay by totally ignoring the process, presumably hoping that the proceedings would go away. They did not but the effect of Fred's strategy was that at each step in the proceedings we had to demonstrate that we had given him every opportunity to take an active part. That inevitably caused delay. However, eventually our perseverance proved successful and as indicated, our client was able to acquire the business and the property from which it ran.
Secondly, could the long period of worry, concern and inability to invest in the business caused by the uncertainty of the proceedings have been at best avoided or at least reduced had the two parties entered into a properly considered partnership agreement that effectively dealt with their respective positions during the life of the partnership and who was to receive what on its dissolution? The two partners never entered into a partnership agreement that properly set out their respective positions during the lifetime of the partnership and who was to get what on its dissolution. Had that been done, then the likely result would have been a negotiated settlement achieved in a reasonable timescale rather than the necessity of a long and expensive Court process.
Hugh Ellins, a partner in Charles Lucas & Marshall who acted in this matter says:
"The case demonstrates the need for a properly drawn partnership agreement particularly where the partnership is between friends or relatives. This does not have to be a complicated document but does have to cover the issues which are important to the particular partners. These are normally provisions dealing with:
Capital share
Income share
Termination/dissolution
Just like a marriage, partnerships are easy to get into but emotionally wearing and expensive to break if there is no properly drawn agreement.
The client commented:
"Hugh Ellins of Charles Lucas & Marshall fought tirelessly on my behalf for more than 4 years for a result that morally I was entitled to but due to my own stupidity I could have lost out in the eyes of the law.
Entering into a new business venture, especially when the business partner is a family member is an exciting time; enthusiasm and trust run high and promises are made and believed.
A few months into what should have been a long-term arrangment, my business partner stopped working on behalf of the business but was still entitled to 50% of the profits.
Although he had only introduced a small amount of capital, I spent the next 4 years under the threat of losing the business, my home and a percentage of the capital that I had introduced from selling my previous home, as he tried to obtain 50% of everything instead of the 16.5% he was entitled to.
I would advise anyone, no matter how close the relationship, to draw up the relevant legal documents to stipulate what should happen if things go wrong. When it all turns sour, previous promises, commitments and understandings are meaningless.
I do owe a lot to Hugh Ellins, who could always see the light at the end of the tunnel, and kept my confidence boosted at times when I was at an all time low - but I don't think either of us expected it to last for 4 years!
I have learnt a lot."
For more information contact Hugh Ellins on 01793 511055 or hugh.ellins@clmlaw.co.uk
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