Getting out of a partnership without a contract

Getting out of a partnership without a contract

The business partners should sign a partnership agreement that spells out how the business will be run, how the profits and losses will be split, what will happen if the partnership breaks up, and other important details.

In cases where there isn't a partnership agreement or some of the terms aren't clear enough about how to end the partnership, the Partnership Act 1961 comes into play.

Breakup of a relationship

By expiration of time or notice

Section34. (1) A partnership ends, unless the partners agree otherwise: (a) if it was made for a set amount of time, when that time is up; (b) if it was made for a single adventure or project, when that project is done; or (c) if it was made for an unspecified amount of time, when one partner tells the other or others that he wants to end the partnership.

(2) In the last case, the partnership ends on the date specified in the notice or, if no date is specified, on the date the notice is sent.

Section 35: a partnership agreement can end when one of the partners dies or goes bankrupt, or when one of the partners goes to court and gets an order to end the partnership (Section 37).

In an interesting twist, if there is no partnership agreement that says how a partnership can be dissolved or ended, a partner can give written notice of his or her intention to dissolve the partnership as of the date written in the notice or the date the intention to dissolve was communicated.

What happens when a partnership ends?

In a standard Partnership agreement, the steps for dissolving the partnership and how to pay would be as follows: "On a relevant event, the Continuing Partners have the option (to be exercised by written notice to the Seller no later than [one month] after the relevant event) to buy the Former Partner's share in the Partnership's capital as of the date of the relevant event.

"If the above-mentioned option is not used by the Continuing Partners, the Partnership is to be dissolved and its assets sold according to the 1961 Act, but each Partner is free to bid at any sale of Partnership assets."

"The Partnership's auditors must certify in writing the price of the Former Partner's share in the Partnership as soon as possible after the event in question, and that certification is binding and final for both the Continuing Partners and the Seller."

"The Continuing Partners shall agree that, if the option is taken, they will pay off all of the Partnership's debts and pay the Seller in full, on demand, for all of the Partnership's debts."

*A relevant event happens when or if a partner retires, is kicked out of the Partnership, goes bankrupt, becomes a patient under the Mental Health Act 2001, or dies.

But there are times when a partnership doesn't have a written agreement and the partners can't agree on anything. One way to solve the problem is through mediation. At the end of a mediation, the parties may sign a settlement agreement with the terms they have agreed on (in the event the mediation is successful).

Other things that will happen if a partnership ends without a partnership agreement:

Each partner will share the business's debts and obligations as long as the partnership is still in place and the business is running normally.

How Partnership Property Is being disposed of

After the partnership ends and the partnership's auditor has looked at its assets, the partners can sell the assets at the most favourable terms and prices that can be found and pay off all of the partnership's debts. This would depend on whether or not all of the partners agreed.

Tax Implications

When ending a partnership, you should always talk to your accountant to make sure you know about any tax obligations you may have because of the partnership and to get the right statements for your tax return. This is important if any of the assets of a partnership you were a part of were sold while you were still a partner.