Partnership & LLP Disputes.

A partner can only be expelled from a partnership if the partnership agreement contains an express power of expulsion — under the Partnership Act 1890, no majority of partners can expel a partner unless such a power has been agreed. Where the agreement does contain an expulsion clause, it must be exercised strictly in accordance with its terms and in good faith — the power cannot be used for an improper purpose, and the expelled partner must usually be given the opportunity to respond to the grounds for expulsion. Common grounds for expulsion in partnership agreements include serious breach of the agreement, misconduct, bankruptcy, incapacity, or bringing the partnership into disrepute. If there is no expulsion clause, the only way to remove a partner against their will may be to dissolve the partnership entirely and reconstitute it without them — a drastic step. Expulsion is legally sensitive and must be handled carefully, with advice, to avoid claims of wrongful expulsion.

LLP disputes differ from traditional partnership disputes because an LLP is a separate legal entity with its own characteristics. Key differences include: the LLP itself, not the members, owns the assets and owes the liabilities, and members generally have limited liability; the relationship is governed by the LLP agreement and, in default, by the Limited Liability Partnerships Act 2000 and regulations that apply certain company law provisions to LLPs; members are not automatically entitled to the same default rights as partners under the Partnership Act 1890; and because an LLP has separate personality, its existence is not automatically ended when a member leaves. Some company law concepts apply to LLPs — for example, members may in certain circumstances bring claims analogous to unfair prejudice or seek winding up. However, where there is no LLP agreement, the default statutory provisions are limited and can leave significant gaps. As with partnerships, a well-drafted LLP agreement is the best protection against disputes.

Disputes about partnership accounts and profit shares are among the most common partnership disputes. They can arise from: disagreement about how profits should be divided — particularly where there is no written agreement and the equal-sharing default of the Partnership Act 1890 applies despite unequal contributions; allegations that a partner has taken excessive drawings or has not accounted for money or assets; disputes over the valuation of the business or its goodwill; and concerns that the accounts do not accurately reflect the partnership's financial position. A partner has a right to true and accurate accounts and to full information about the partnership's finances. Where there is a dispute, a partner can seek an account — a legal process requiring the partnership's financial affairs to be examined and the correct entitlements determined. Forensic accounting evidence is often required. Resolving accounts disputes can be complex, and early legal and accounting advice helps establish the true position.

Partnership and LLP disputes are resolved through a range of routes, and as with other business disputes, most are settled without a final court hearing. The starting point is usually negotiation between the partners or members, ideally guided by the partnership or LLP agreement if one exists. Mediation is particularly valuable in partnership disputes because it is confidential and can help preserve relationships and find commercial solutions — important where the partners may need to continue working together or to part on manageable terms. Where the agreement provides for arbitration or expert determination, those routes may apply. Court proceedings — such as a claim for an account, a dissolution action, or a claim for breach of partners' duties — are available where other routes fail, but are expensive and can be damaging to the business. The right approach depends on the circumstances, but the priority is usually a commercial resolution that protects the client's interests while limiting damage to the business. Early advice is key.

The most effective way to prevent partnership and LLP disputes is to have a comprehensive written agreement in place from the outset — a partnership agreement for a traditional partnership, or an LLP agreement for an LLP. Relying on the default rules of the Partnership Act 1890 is a frequent cause of disputes, because those rules often do not reflect what the partners actually intended. A well-drafted agreement should address: how profits and losses are shared, reflecting the partners' actual contributions; how decisions are made; the roles and responsibilities of each partner; what happens when a partner wants to leave, retires, dies, or becomes incapacitated; whether and how a partner can be expelled; how the business and any goodwill are to be valued; restrictions on competing with the partnership; and how disputes will be resolved. Putting this in place when the partners come together and relationships are positive provides a clear framework that prevents many disputes and makes the rest far easier to resolve. It is a modest investment that can save enormous cost and difficulty later.

Dissolution is the ending of a partnership. A partnership can be dissolved in several ways: by agreement between the partners; under the terms of the partnership agreement (for example, on a partner's retirement); automatically under the Partnership Act 1890 where there is no agreement to the contrary — including on the death or bankruptcy of a partner or where a partner gives notice; or by order of the court on grounds such as a partner's incapacity, misconduct, or where it is just and equitable to do so. On dissolution, the partnership's affairs are wound up: its assets are realised, its debts and liabilities are paid, and any surplus is distributed among the partners according to their entitlements. Where one or more partners wish to continue the business, they may buy out the outgoing partner's share rather than winding up entirely. Dissolution can be disruptive and contentious, particularly without a written agreement governing the process — taking legal advice early helps manage it and protect each partner's interests.

Partners owe each other duties of the utmost good faith — partnership is a fiduciary relationship, meaning partners must act honestly and in the interests of the partnership rather than for personal gain at the others' expense. The Partnership Act 1890 sets out specific duties, including: the duty to render true accounts and full information on all things affecting the partnership to the other partners; the duty to account to the partnership for any private profit derived from any transaction concerning the partnership or its property; and the duty not to compete with the partnership without consent, accounting for any profits made if they do. These duties continue throughout the partnership and, in some respects, during its winding up. Breach of these duties — for example, by a partner diverting business or assets, taking secret profits, or concealing information — is a common basis for partnership disputes and can give rise to claims for an account and compensation.

Where partners have not entered into a written partnership agreement, their relationship is governed by the default rules in the Partnership Act 1890 — and these default rules often surprise partners and cause disputes. Under the Act, in the absence of agreement: profits and losses are shared equally, regardless of the partners' respective capital contributions or workload; no partner is entitled to a salary; all partners are entitled to take part in management; decisions on ordinary matters are taken by majority, but changes to the nature of the business require unanimity; and — most significantly — the partnership is dissolved automatically when any partner leaves, retires, dies, or gives notice to dissolve. This last rule means that without an agreement, a single partner can bring the whole partnership to an end, throwing the business into crisis. The absence of a written agreement is one of the most common causes of serious partnership disputes, which is why putting one in place is strongly recommended.

When a partner leaves, the treatment of partnership assets and liabilities depends on whether there is a partnership agreement and whether the business continues. The outgoing partner is generally entitled to be paid the value of their share in the partnership — including their share of the capital and any undrawn profits — and to be indemnified against the partnership's liabilities. If the business continues, the remaining partners usually buy out the outgoing partner's share, ideally at a value determined under the partnership agreement or, failing that, by valuation. The outgoing partner remains liable for partnership debts incurred while they were a partner, and may remain liable for future debts to existing creditors unless proper notice of their departure is given. Valuing the departing partner's share — particularly any goodwill — is frequently contentious. A clear partnership agreement dealing with the consequences of a partner leaving avoids much of this difficulty; without one, the position is governed by the Partnership Act 1890 and is often disputed.

The consequences of a partner's death or incapacity depend on the partnership agreement. Under the Partnership Act 1890, in the absence of agreement to the contrary, the death of a partner automatically dissolves the partnership — which can be highly disruptive, forcing the winding up of the business at a difficult time. A well-drafted partnership agreement avoids this by providing for the partnership to continue among the surviving partners, with the deceased partner's share passing to their estate and being bought out at a value determined under the agreement. Similar provisions can deal with incapacity — for example, allowing the other partners to continue the business and buy out the incapacitated partner's share. Without such provisions, the death or incapacity of a partner can throw the business into crisis. Partners should ensure their agreement addresses these events, and should consider how they interact with their wills and any partnership life assurance arrangements.

A partnership dispute is a disagreement between the partners in a business about how the partnership is run, how profits are shared, or the conduct of one or more partners. They commonly arise from: disagreements about the direction or management of the business; disputes over the division of profits or partners' drawings; concerns that a partner is not pulling their weight or is acting against the partnership's interests; breakdown of trust between partners; disputes when a partner wants to leave or retire; disagreements about bringing in new partners; and the consequences of a partner's death, incapacity, or misconduct. Partnership disputes are often especially difficult because partnerships are built on a relationship of mutual trust and good faith, and when that breaks down the consequences can be severe — particularly where there is no written partnership agreement to provide a framework for resolution. Early legal advice is important to protect each partner's position and the business itself.

These are three distinct business structures with different legal characteristics. A traditional (general) partnership, governed by the Partnership Act 1890, is the relationship between persons carrying on business in common with a view to profit; it has no separate legal personality, and the partners are personally liable, without limit, for the partnership's debts. A limited liability partnership (LLP), governed by the Limited Liability Partnerships Act 2000, is a separate legal entity that combines the flexibility of a partnership with limited liability for its members — the members are generally not personally liable for the LLP's debts beyond their investment. A limited partnership, governed by the Limited Partnerships Act 1907, has at least one general partner with unlimited liability who manages the business, and one or more limited partners whose liability is limited but who cannot take part in management. The structure affects liability, taxation, governance, and the rules that apply when disputes arise, so identifying the correct structure is the starting point in any dispute.