Tough decisions for business partners who fall out

By Jonathan Goldberg, December 29, 2010
Dissolving a commercial partnership is straightforward… in theory

Dissolving a commercial partnership is straightforward… in theory

Philip from Bournemouth writes: Ever since we were small boys growing up together, I have been extremely close to my cousin. Some 12 years ago when our children had grown up and were off our hands, and we had each been made redundant by a large company, we opened as partners together in a home catering business. We never bothered with any written partnership agreement.

We worked hard from home, and in the early years at least, we worked well together. The business prospered, to the point where we now employ five full-time members of staff, we rent our own office and kitchen facilities, and we own various vehicles, including an expensive mobile kitchen. The turnover and net profit figures of the partnership are very satisfactory, and we enjoy an excellent reputation locally.

Sadly however, my cousin has become increasingly difficult to work with in recent years. He seems to have changed personality as he has got older. Or perhaps it is simply that certain of those personality traits which I was once willing to overlook, are now increasingly offensive to me. He is selfish and dictatorial. He behaves as if he were the centre of the universe and were solely responsible for our success, whereas in truth he repels some important clients with his loudness, arrogance and coarse manner.

He insists that we employ his stepson full time, to whom he is intensely loyal, even though in my opinion the latter does not really pull his weight. His chief contributions to the business seem to be to wine and dine our already existing corporate clients, and to flatter my cousin unquestioningly through thick and thin that he is brilliant, which frankly he is not.

It has reached the point where I feel we can no longer work together. Do you have any ideas as to how I could get out of this partnership cleanly, and with as little disruption as possible to the business itself and also to our families, in order that I may continue in business on my own in future?

Philip, I fear you are asking for the impossible. As in so many situations in life, getting in is easy. It is the getting out that is tough.

The English law on partnership is admirably sensible and straightforward, perhaps because the main governing statute, The Partnership Act of 1890, was passed at the height of the Victorian era. The British Empire then ruled over a quarter of the world, and a buccaneering attitude and a lack of regulation predominated, thus encouraging free trade. How different this is to most other areas of life today, even though there are almost as many partnerships as trading companies in Britain today.

This Act provides a default code which kicks in whenever, as in your case, informal partnerships have simply sprung up over the years, without any formal agreement. In essence, each one of you is considered to be an agent for the other in law. Each one of you shoulders unlimited liability for all the partnership debts and obligations. Therefore, you are entitled to share equally in the capital and profits of the firm, and in the management decisions. Each one of you can dissolve the partnership at any time, by simple notice to the other.

On dissolution you can either co-operate to dispose of the business as a going concern, or for one of you to buy out the other. In default of agreement, an independent third party can be appointed to dispose of the assets, pay the debts, and split the balance between you.

It is of course wise to notify all your clients at the point of dissolution, in order that you are no longer held liable for future debts incurred by your cousin. If circumstances become acrimonious, it is not unknown for one partner to go on a last spending spree at the expense of the other.

So the theory of dissolving the partnership is easy, but the practice, I fear, will not be so straightforward. Experience teaches that your chances of salvaging your former friendship, let alone your family "togetherness" from such a dissolution, are indeed slim. And you need to calculate how many of your old clients will remain loyal to you rather than him if you were to move.

Thus you need to weigh up carefully whether your day-to-day working relationship is really so intolerable as to be worth paying this high price. There are certain parallels with divorce. Sometimes the devil you know is preferable to the devil you don't know. Only you can decide that question, Philip.

The above is not formal legal advice and is given without liability. Jonathan Goldberg QC, of Ely Place Chambers, is a leading London barrister

Last updated: 2:29pm, December 29 2010