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When Business Partners Fall Out – What to Consider to Protect Your Interests

Company partnerships may take many forms and go in various directions but not all of them lead to a successful and productive long-term collaboration. When you establish a business or partnership with another person or organisation, it is paramount that you have a complete understanding of how to proceed in case the alliance comes to a sudden end. Even if you’re building the business with a friend, the possibility of dissolution is always worth accounting for. In this blog post, we look at how to protect your interests in the event that you fall out with a business partner.

What causes disputes between partners? 

The main reason these disputes emerge is when one owner believes that other business partners are not acting in their company’s best interest. They could have fundamental creative differences in terms of how they want the business to develop – mediation is typically the first course of action to try to repair the partnership and refocus the company. In all likelihood, every owner wants the best (and most profitable) outcome for their business and has differing opinions on what constitutes success or how they can attain it. If mediation fails, the organisation’s complete dissolution could be inevitable. 

There are numerous other contributing factors towards these disputes. Conflict might emerge if your company fails to develop a significant customer base, for example – especially if one owner is considering taking the firm in another direction to recoup losses. The pressure of success as the organisation rapidly grows could also lead to difficulties, possibly due to the partners having different ideas for the company’s next steps. Without a clear long-term plan for the organisation, it’s entirely possible for the owners to have goals and priorities that are at odds with each other, leading to friction and disagreements.

How drafting a Partnership Agreement can help:

A partnership agreement is an important document for any company co-owner, especially if they worry about the possibility of dissolution. The partnership might end due to conflict and falling out but may also be because of shifting life priorities or personal matters. No matter the reasons, a well-written agreement serves as a legal framework for the partnership, including its dissolution and how this may fairly proceed. This document usually establishes who is responsible for the firm’s contracts, debts, and intellectual property. It also sets out how the owners will divide the company’s overall assets after dissolution.

Without an agreement, the Partnership Act 1890 stipulates that a partnership automatically dissolves if one of the partners states they want it to end. This may sometimes take the form of a Court order if a partner applies for dissolution through the Act, which is often necessary when the partnership is no longer amicable. In these situations, comprehensive legal advice and assistance is vital, allowing you to navigate complicated legal issues with ease. Your counsel could advise the creation of a partnership agreement or help you use the document to make sure you receive a fair and equitable outcome.

The importance of legal counsel:

Hiring a lawyer can provide you with guidance through any partnership difficulty, including by advising on how to potentially mediate this situation, which might prevent the dissolution. If the partnership’s end becomes an inevitability, your attorney works to protect your interests and ensures that you’re able to use the partnership agreement to maintain control of your assets wherever possible. The dissolution processes can be complex for every partner and includes notifying vendors, creditors, and other relevant parties; a lawyer can help you with this. They are also able to assist you with closing the company’s shared bank accounts.

If your partnership agreement doesn’t contain comprehensive information on how to divide the account funds and assets between partners, a lengthy negotiation may follow. Your attorney can create a mutually beneficial agreement that accommodates the requests and demands of your partners to a degree while making sure you receive fair compensation. Make sure to take your time throughout the dissolution procedure, as rushing it can cause you to lose more assets than necessary. Discuss your interests at length with your lawyer to ensure high-quality representation; do not back down if the other partners try to rush you into accepting a compromise.

What happens if the company shuts down?

Though it’s entirely possible for the business to continue under a single partner’s ownership, the company may dissolve alongside the partnership, impacting asset ownership and liability. The Companies Act 2006 lets firms voluntarily remove themselves from the Companies House register; this could be the outcome of a partnership dissolution.  

Under section 39 of the Partnership Act 1890, on dissolution of a partnership every partner is entitled to have the property of the partnership applied to the payment of its debts and liabilities, and to have the surplus distributed among the partners. This can normally be achieved in one of only two ways – either by way of a sale to a third party, or by way of the purchase of the interest of one or more partners by the other partner(s). 

Most companies rigorously negotiate the division of these assets in advance of a dissolution, but the assets go to creditors if the partnership and company dissolve due to financial issues. Any partner or his representatives may on the termination of the partnership apply to the Court to wind up the business and affairs of the firm. 

Dissolution usually extinguishes a company’s liabilities. Partners inform vendors and clients in advance of their partnership and business dissolving specifically to protect themselves from the liabilities which may otherwise emerge. If your organisation has unsecured debts, creditors can still take legal action against the company and its partners by temporarily restoring it to the register. This significantly affects the assets or compensation you receive after the firm’s closure. In any situation where your partnership and organisation are at risk, good legal counsel can argue your case and secure your interests. 

Falling out with your company partners may not be something you expect to happen, but it’s still a possibility worth accounting and preparing for. Make sure that you draft a strong partnership agreement and secure legal representation in case dissolution becomes the only viable path.  

MSR specialises in various areas of the law, helping London clients with conveyancing, immigration, family law and business matters. Our team has over 30 years of combined experience, allowing us to deliver premium legal services you can trust. To learn more about how we could help you during partner disputes.

*This article is not legal advice but provides a general overview. The specific details of your case will determine the best course of action.