Andrew Ryan – partner at Davis Blank Furniss – on expulsions from a partnership
Can you expel an individual from a partnership?
Only if a power to expel has been expressly agreed between the partners (typically in a partnership agreement) and the right to expel has been triggered.
What are the options if you do not have a partnership agreement and the majority of partners wish to expel a partner?
There are only two realistic options: (1) reach an agreement with the individual or (2) wind up the business.
Can you wind up the business and simply start again without the individual?
Yes - in theory - but this can lead to a number of very unattractive consequences - including adverse tax consequences, termination of employment contracts, termination of retainers with clients etc.
What kind of expulsion provisions do you ordinarily find in a partnership agreement?
Each agreement is different (and should be tailored to the particular business) but often grounds for expulsion will include:
a. Material or persistent breaches of the partnership agreement
b. Misconduct issues e.g. being convicted of a criminal offence or professional conduct issues
Can the expelled partner challenge their expulsion even if it is justified on the wording of the expulsion clause?
Yes. Partners must not exercise their expulsion powers in (1) bad faith or (2) for an ulterior motive. In broad terms the question to be answered is: was the decision to expel the individual one which no reasonable person could have taken in good faith for the benefit of the firm as a whole? If the answer is: no, then the decision may be declared invalid.
What are the consequences if the decision to expel is held to be invalid?
The partner is entitled to his/her drawings after the purported expulsion and possibly a claim for damages (e.g. for loss of reputation). The partner may also be able to use the failed attempt to expel them as grounds to seek to dissolve the partnership.
What would you suggest to a business which feels it must expel a partner?
Seek advice before acting - both as to whether there are grounds for expulsion and also as to the procedure to be followed to expel the partner. You maybe well advised to negotiate a settlement agreement setting out the terms on which the partner is to retire from the partnership.
Is the outgoing partner entitled to information about payments made to other outgoing partners?
Yes - as the outgoing partner has the right to inspect the partnership books.