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Advice on Limited Liability Partnership Breakdowns and Disputes

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Updated: 5th February 2020

How to handle breakdowns and disputes within an LLP

Unfortunately, partnership disputes are a fairly common occurrence. The strains and pressures of everyday business can lead to people changing beyond recognition and/or falling out – which can mean serious repercussions for a business partnership.

At Real Business Rescue, we help members of business partnerships during times of internal discontent which can often be instigated by financial distress such as debts, creditor pressure, HMRC tax or VAT bills and so on. We tend to refer clients to trusted mediators/solicitors for non financial disputes, such as when individuals feel a fellow partner isn’t pulling their weight or following a partner’s retirement or expulsion.

Typical partnership disputes that derive from financial pressures can be all manner of things, such as a partner being irresponsible with business spending, one partner falling bankrupt and leaving all debts to the other partner(s), or simply a breakdown of trust in the relationship and the dissolution of a struggling business is required.

Where do you stand legally?

There are two crucial pieces of business partnership documentation that come to the fore in situations where partners are in dispute.

The first document is The Partnership Act 1890 which is government legislation that provides the default rules for the mutual rights and duties of the partners. The second document you should refer to is your Partnership Agreement which, hopefully, you put in place when starting the business.

These documents are crucially important and provide the framework for your business to prosper. Like any solid foundations, they might not be at the forefront of your mind but when things get rocky and the foundations start to shake, you’ll be hugely relieved that they are in place.

How can these documents help you?

Without a partnership agreement in place, it is impossible to expel partners, to control the distribution of profits or to even force partners to actually come to work. A partnership agreement truly is an essential piece of documentation.

We often view the start of a business partnership as like two people getting married. Your destiny is tied to that of your partner and there must be complete trust between you both. If you break up, things can get very convoluted. A partnership agreement can certainly lessen the chances of ensued chaos and provide a legal framework with which to go by.

Without a partnership agreement in place, insolvency practitioners like ourselves will revert back to the Partnership Act 1890 which is referred to in these circumstances as a ‘partnership at will’. This is an unstable business structure and means:

  • Partners are treated equally in the sharing of capital, assets, profits and workload, regardless of how much capital or effort is brought into the business.

  • The death or bankruptcy of a partner likewise automatically triggers dissolution.

 A documented partnership agreement can be of huge assistance for the structure of the firm, clearly outlining:

  • What is required by each partner in terms of financial input

  • How income will be distributed from any profits

  • How losses will be shared

  • What partners can take as drawings or salary
  • The value of partnership assets such as loans or investments
  • How decisions are made and key ‘what ifs’ such as what happens if one of the partners dies, leaves, is made bankrupt etc...

If you are in dispute over financial troubles in your partnership or limited liability partnership, you can arrange a free consultation with a licensed insolvency practitioner in your area. Alternatively you can call us on 0800 644 6080 for free, immediate advice.

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