Partnership Disputes

Disputes often arise when partnerships end as a result of:

• Parties not agreeing what the assets of the partnership are. For example, there may be a substantial asset such as a property which is registered at HMLR in the name of one party but the other party contends that it is an asset of the partnership and so they are entitled to a share in it.
• Parties not having kept proper current and capital accounts for the business. The result of which is often that neither party has a true understanding of what they are entitled to on the dissolution of the partnership.
• One party believing that simply because their capital account stands in credit to a certain sum, they are automatically entitled to that sum. Usually that is not the case.
• Goodwill valuations having been entered into accounts at an over/under inflated level.
• Asset values having been entered into accounts and then not having been updated for years or even decades. This is particularly relevant to property valuations where a partnership acquires a property and enters its value into the accounts at the purchase value, years pass and when the assets are determined the increase in property value has a dramatic value on capital account values.
• Assets such as goodwill being naturally acquired by one partner on dissolution which then must be accounted for back into the partnership.
• An account not being taken in good time and an outgoing partner then being able to elect to claim either a share of profits moving forward from the business they have left or interest as to their capital entitlement.

Partnership disputes typically fall into two categories. The first category includes partnerships governed by a Partnership Agreement. This is a legally binding contract between all business partners, outlining each partner’s rights, responsibilities, and the rules for running the business. It often includes provisions for handling disputes, terms for partner exits and retirements, and formulas for calculating and paying out an exiting partner’s interest.

The second category includes partnerships governed by the Partnership Act 1892. This is a default set of terms that apply to partnerships in the absence of a written agreement. Under this Act, all partners are considered equal, sharing legal and financial liabilities equally. However, this can lead to complications, such as potential financial loss and legal liability, as well as an unclear and complicated process for exiting the partnership.

Therefore, it’s generally recommended for partners to establish a written Partnership Agreement to clearly define the terms of their partnership and avoid potential disputes.