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Fifty ways to leave your partner

Sometimes partnerships don't turn out as planned. So when is it right to drop off the key and set yourself free?

Many architects choose to work in partnerships, preferring the flexibility these offer over companies as a business vehicle. Partnerships can vary widely in size from informal associations of two persons in short-term ventures to family businesses to large professional partnerships with elaborate management structures.

Circumstances can often arise that lead to a breakdown in the relationship between the majority of partners and one or a minority of their co-partners. This might be because a partner's individual business interests begin to conflict with the business of the partnership. For example, a partner starts to deal with clients of the firm in his or her private business affairs so that a conflict arises or might arise. Similarly, difficulties might crop up between a partner and a significant client of the firm. There can also be performance or personal issues, or differences of opinion about how the business should develop and what roles each partner should play in such development.

These problems are often resolved internally or by individual partners moving on by consent. But what if difficulties emerge and the individual partner or minority does not want to go it alone, move to another business or set up a spin-off firm?

Retirement plan, Stan Many partnership agreements include a clause providing for compulsory retirement where no reason need be given. (Compulsory retirement is not age-related but is a provision that enables the partnership to require a partner to move on if there are difficulties in the relationship. ) The clause may permit all the partners other than the outgoing partner to require the latter to retire by not less than, say, six months' notice in writing. This might be an appropriate notice period for a professional partnership such as a mid-sized architectural consultancy, but a longer notice period might be agreed for a larger professional firm or a shorter period for a partnership formed for a short-term venture. Some such clauses do not require unanimity among the majority partners but allow for such notice to be required if all partners except one or two (in addition to the outgoing partner) agree.

Where there is a compulsory retirement clause, even though there is generally no requirement for a reason to be given, the partnership agreement may provide for the outgoing partner to be informed of the proposed resolution for compulsory retirement in advance of a meeting at which the partners will vote. The outgoing partner may have a right to be heard at the meeting, although this is uncommon.

Such an approach, which should allow each partner to form his or her own view, is consistent with the exercise of each partner's duty of good faith.

One would expect to see clauses dealing with the financial entitlement of a compulsorily retired partner, which may or may not differ from the provisions on voluntary retirement or retirement for other reasons.

Avoid expulsion Expulsion, although it might be considered in cases of a complete breakdown in the relationship, is generally thought to be too draconian and inappropriate. It carries risks of damage to reputations even where confidentiality provisions form part of any negotiation or settlement agreement. Also the majority could often expect expulsion to be contested (with the consequent expense of time and costs) unless there are clear grounds for it under the partnership agreement. These grounds usually include factors such as: a partner being unable to pay his or her debts; permitting a charge on his or her share of partnership property; failing to account for money received in respect of partnership transactions; breaching the duty of good faith between partners;

or being guilty of conduct that would damage the reputation of the firm.

Dissolution made easier Where there is deadlock between the parties, can the disruption of a general dissolution under Section 35 of the Partnership Act 1890, with a view to reforming a new partnership, be minimised so as to make dissolution a feasible solution? Following dissolution, while partners can complete work already in progress in the old partnership, they may not take on any new work. This is, therefore, when most damage can be done to the business even though it might be the intention of the majority to continue in a new partnership with different membership. The potential loss of work coming in and damage to client relationships may make the transition difficult on a practical level.

Where the issue is the exit of a partner or minority where agreement for retirement cannot be reached, the court has acted in favour of the majority to prevent the unnecessary winding up of viable businesses if the outgoing partner's legitimate interests could be met by less drastic measures.

Normally on dissolution a partner would receive his/her share in the net proceeds after all partnership assets have been sold and debts paid. However, where the majority want to carry on the business and are prepared to pay the outgoing minority the market value of his/her/their share they can apply for a discretionary Syers v Syers order.

If granted, instead of an order for the sale of the partnership assets, the court (or arbitrator) will order an inquiry into the market value of the outgoing minority's share and payment of that amount by the continuing partners.

'Rowdy pardner' Syers v Syers (1876) 1 Appeal Case 174 concerned a family business in which two brothers, Daniel and Morris, entered into a partnership at will running a music hall and tavern. Morris had a seven-eighths share in the business and Daniel the remaining one-eighth share. The partnership was held to have been dissolved by a pleading filed by Morris.

The House of Lords declined to follow the ordinary course, which would have been to order the sale of the business and the distribution between the partners of the net assets after payment of partnership debts and liabilities. Instead it made an order that Daniel's share should be valued as if the business was sold as a going concern on the date of dissolution and that his brother should have the right to buy his share at that value.

Although there are no recent reported cases in which Syers v Syers orders have been made, there is no doubt that such orders are within the court's discretion. Lord Hoffman said of Syers v Syers in Hammond v Brearley (10 December 1992, unreported): 'It is an authority which is far more frequently cited by counsel than applied.

But the discretion which it gives seems to me to be a valuable one which I think judges should not hesitate to use when it suits the justice of the case.' It also appears that the court and arbitrators are now more receptive to applications for Syers v Syers orders, particularly where the share of the outgoing minority is not sizeable or, as with professional firms, when the sale of its assets such as work in progress and goodwill poses practical difficulties. In negotiations, particularly where the balance of assets and liabilities is such that an outgoing partner's entitlement on dissolution may not exceed his or her entitlement on retirement, the majority, even if they want to avoid dissolution, may propose dissolution plus a Syers v Syers order to force the other party to the table.

In the minority Some issues concerning the interests of a minority have been touched on above. Provided that the contractual entitlement of a minority would be significantly disadvantageous, or otherwise incapable of being realised, compared with the minority's entitlement on dissolution, there is no reason why a minority cannot ask the court to exercise its broad discretion to order dissolution under the Partnership Act 1890 in order to break a deadlock in an exit negotiation. In such a case the court is certain to consider whether more appropriate remedies exist - could the minority achieve a broadly comparable outcome in respect of their interests by retirement provisions in the partnership agreement?

Reform of partnership law The government has sought opinion on the costs and benefits of the recommended changes in partnership law put forward by the Law Commission last November. Two key areas for review were the continuity of businesses irrespective of changes in the membership of partnerships, and the simplification of the process of solvent dissolution.

It remains to be seen if and how these changes will be implemented and whether 21st-century partnership law will no longer require the 19th-century Syers v Syers jurisdiction.

Selina Haniff is a solicitor in the dispute resolution department of Reynolds Porter Chamberlain. Visit: www. rpc. co. uk

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