A FEW months ago we wrote about
the partners’ duty to act in the
utmost good faith. This month we
are going to discuss the perils of
not having an effective and current
partnership deed.
Partnerships can, of course, be in
place without a deed and governance
of such
partnerships
is under the
Partnership
Act 1890.
Partnerships
at will, while
governed
by statute,
will render the partners otherwise
vulnerable.
Having a deed prepared by an
appropriately experienced solicitor
will override the default statutory
provisions that would otherwise
govern the partnership and provide
much-needed security. A well-drafted
partnership deed will contain the basic
necessary information to ensure the
partnership operates smoothly.
Such information includes, but is not
limited to:
- who the partners are;
- the commencement date of the
partnership; - the nature of the partnership’s
business and its name; - the sharing of profits and losses;
- the investments to be made as the
capital of the partnership; - the management of the partnership
including arrangements for voting,
absences, locum cover, etc.; - the partners’ obligations to the
business; - the resolution of partnership
disputes; - what happens upon dissolution of
the partnership or upon the admission,
death or retirement of any partner; - covenants from partners, including
post-dissolution covenants.
While this appears somewhat
obvious, the absence of a properly
drafted partnership deed may lead to
problems emerging in the course of
time.
Practices are urged to adopt a
preventive approach by formalising their partnership, rather than suffer
when problems do arise.
Partnership disputes are inherently
disruptive and very costly both in
terms of stress and money.
Disputes arising out of a partnership
at will cost, on average, 15 times that
of a dispute arising out of a formalised
deed.
Formalised partnership deeds do
not prevent disputes, but do provide
a method by which to approach such
disputes with hope of a resolution.
‘Shocking’ statistics
Given the dangers of not having a
formalised partnership deed, it is
somewhat shocking that it is thought
that only 50% of UK veterinary
practices have a partnership agreement
in place.
Of these agreements,
only 70% could be
considered to be well
drafted. So, whilst 35%
of practices have an
effective agreement,
65% operate without
safe and effective
provision.
It is crucial that the partnership deed
is up-to-date and effective, not merely
in existence.
A partnership at will can be brought
to an end at any time by one of the
partners giving notice to the other(s);
for example, “I have lost the will to be in partnership with you.” Not only is this the most unstable imaginable
relationship, there are a number of
default provisions that will almost
certainly not reflect the intended
arrangements.
For example, under the Partnership
Act, the partners are to share equally
both the profits and the debts of the
practice.
Often this equal division does not
reflect the individual contributions
made. A partnership deed, by contrast,
allows for individual interests and
pro t shares to be clearly stated.
Automatic dissolution
When a partner decides to leave a
partnership at will, the partnership
dissolves automatically. This also
happens when a partner is asked to leave or when a new
partner joins.
Such dissolution
may cause a forced
sale of the partnership
assets, potentially
including the practice
premises.
The practice
staff will be made redundant. Contractual arrangements
will automatically terminate. The
potential problems are multitudinous.
In stark contrast, under a formalised
partnership deed, dissolution will not
occur unless all of the partners agree
or such dissolution is ordered by the
court or an arbitrator.
