‘It may be tempting to try and remove a partner swiftly in order to try to limit the damage to the business,’ says Mark Blake, Partner in the dispute resolution team with QualitySolicitors Parkinson Wright. ‘But what happens if the partner is later exonerated? If they were wrongly removed, the partnership will face a different set of problems and significant costs in compensation.’
Mark looks at how to manage this situation, and how risks can be mitigated if dealt with in the right way by taking early advice.
How is your partnership governed?
Your options will depend on how your partnership was formed, as this determines how it is governed.
Most modern partnerships will be governed by a partnership agreement (sometimes known as a partnership deed) which sets out the key terms on how the partnership is to be governed. This covers what happens if a partner breaches their professional standards, or breaches any of the terms of conduct required from them as agreed between the partners.
If there is no partnership agreement, then the partnership is governed by the default terms set out in the Partnership Act 1890. However, this has limitations as there is no flexibility in asking a partner to leave, and this legislation does not adequately cover many issues that arise in a dispute between partners, which can be akin to a divorce.
All partners must comply with certain duties, known as ‘fiduciary duties’, to act in good faith towards co-partners and the partnership in general, which includes acting honestly and not in conflict with the partners.
Depending on what the partnership does commercially, there are likely to be additional external professional standards set by a governing or regulatory body. A breach of these is likely to result in an overall breach of the standards owed to the partnership.
Professionals are held to a higher standard than most, so when one falls they will often be viewed harshly and treated accordingly.
Can we remove a partner temporarily or permanently?
Where there is a partnership agreement
A good partnership agreement will include specific provisions in relation to a professional standards breach. In any event, a breach of professional governing standards will inevitably amount to a breach of fiduciary duties owed to the partnership.
If expulsion of a partner due to a breach of professional standards is necessary, then the partnership agreement should set out clearly the process for expelling a partner, including how this decision is made, by whom, and any process for appeal.
Crucially, it should also set out how the remaining partnership should continue.
If there is no partnership agreement
Under the Partnership Act there is no right to expel a partner. The only option is for a partner to serve a notice of dissolution so that the entire partnership will be dissolved. If the remaining partners want to move on without one particular partner, they will have to form a new partnership.
However, this has ramifications that need to be managed very carefully. In particular, how to manage goodwill and maintain reputations that may have built up over years, how to distribute assets and how to continue with a fresh partnership without affecting the value of the partnership that is being dissolved.
Sometimes the dissolution of a partnership can takes months, if not years, while the partnership continues to trade to fulfil certain obligations before it can be fully dissolved. During this time all the partners (including the partner in breach) still owe duties of good faith to each other. Publicity must be carefully managed to avoid affecting client retainers and goodwill, and partners must avoid claims of competing with the old partnership.
What happens if the partner is exonerated after being removed?
Any professional partner accused of a breach of professional standards, and removed as a result, will inevitably face financial and reputational losses that may be hard to recover from.
If that partner was actually innocent, and found to have been removed erroneously, the capacity for that partner claiming financial damages against the partnership can be vast.
If a firm has a partnership deed, then this may be covered by the deed, either by allowing for reinstatement of the partner (if they agree), or for financial compensation for the partner calculated under the agreement.
If not, then unless the partners can reach agreement on what the aggrieved partner should be paid by way of compensation, a dispute may have to be decided in court.
A court has wide powers to protect an aggrieved partner, and it can order damages in their favour to cover loss of earnings and, depending on reputational damage, potential loss of future earnings. For many high-salaried professional partners this can be significant.
It goes without saying that not only will the remaining partnership face a potentially serious financial impact as a result, but if this is given publicity through the court it will inevitably impact the reputation of the remaining partners.
How we can help
If your partnership has a partner who has been accused of breaching their professional standards it is important you do not remove them without seeking immediate legal advice from our solicitors on your options.
For further information, please contact Mark Blake or a member of the dispute resolution team on 01905 721600 or email worcester@parkinsonwright.co.uk
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.