Top 5 Reasons Partnerships go Pear-shaped
Many partnerships are a raging success….. but sometimes the partnership can go Pear-shaped. Here are our Top 5 reasons:
1. A Partner sets up another business and takes clients. A B and C were shareholders in X Co. A and B decided to set up another business Y Co. in competition with X Co to the exclusion of C. A and B took the clients, goodwill and other confidential information of X Co and diverted profits to Y Co. On behalf of C we successfully sued A and B, to force a windup of the company, for breach of fiduciary duty and a buyout of C's share in C's favour.
2. A Partner becomes a bankrupt. On the bankruptcy of a partner, section 36 of the Partnership Act states that the partnership is dissolved. However it may be desirable to have an agreement that bankruptcy does not result in automatic dissolution but will instead operate as a retirement allowing the other partners to buy out the bankrupt partner’s interest at an agreed value.
3. A Partner goes on a frolic of his/her own. Partners can be liable for the acts of other partners if the acts were done in the ordinary course of the firm's business. For example in National Commercial Banking Corporation of Australia Ltd v Batty. Batty was in partnership with Davis in an accounting firm. Davis was also a director of X Co. Davis defrauded X Co by banking cheques through the partnership bank account. In an action to recover the money, Batty was sued because he was Batty's partner and the monies had been banked into the partnership account. Decision: Batty was not liable because the banking of the monies into the partnership account was neither "in the ordinary course of the business” of the firm nor something that Batty had authorised.
4. Identifying Partnership Property. What is partnership property and what is individually owned? Section 23 of the Partnership Act is to the effect that assets that have become partnership property will belong to the partners collectively rather than to each contributing partner individually. If A provides the Premises, B the intellectual property, and C the equipment it will all be considered partnership property. Partnership Disputes will certainly arise as to the value of the contribution by a party unless there is a specific provision dealing with it in an agreement.
5. A Partner isn’t pulling their weight but claiming half the profits. Partnerships can start out with the best of intentions but can go pear-shaped when different dynamics begin to emerge. Some partners may be putting in more effort than the others leading to discontent or resentment. The issue could be solved by a properly worded partnership agreement that particularises the roles and responsibilities of all involved.
Our firm has litigated and resolved partnership disputes involving all of the above issues.
A properly worded and well thought out Partnership Agreement or Shareholders Agreement can minimise the risk and fallout potential.
Contact Evan Sarinas for more information.
This publication is intended as general information only and not specific legal advice. All liability is specifically disclaimed for reliance on same. Seek professional legal advice.
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