This statement sums up the Partnership relationship. The relationship should
offer flexibility, opportunity and balanced against that, risk. In partnership
you entrust to fellow partners your future reputation and prosperity. Each
of us has within our power the ability to enter into undertakings which could
bankrupt our fellow partners.
They say that marriage is a step so grave and decisive that it attracts the
light headed but partnership is a great deal more complex and more dangerous
than marriage. In marriage there are generally two principals and in essence
only one type of relationship is possible. Compare that with a partnership
where as the number of partners increase the number of relationships rises
accordingly. It is essential that the relationship should be reduced to writing.
There needs to be a partnership agreement. It may seem simple, it may seem
obvious but such a document is by no means universal within our profession.
What is the point in a partnership agreement? It is there to regulate what
happens when things go wrong. Let us compare ourselves to other professions.
a) Doctors
They are all too well aware of the illnesses which can strike us down in our
prime and give a quite astounding amount of time and attention to this aspect
within their medical partnership agreements. Typically you find several clauses
dealing with incapacity (long term total, long term partial, short term total
and short term partial) each of which sets out what the respective obligations
of the practice and the afflicted partner might be, who is to determine whether
the incapacity falls within set out categories etc.
Some medical practices go further and have specific clauses to deal with specific
situations, ie where a partner becomes alcoholic.
b) Chartered Accountants
Their contracts contain extensive and detailed Schedules and provisions dealing
with the division of profits. Part of this is encouraged by the certainty or
near certainty that turnover within a well run accountancy practice continues
at much its present level bolstered by the concept of annual recurring fees
which we as a profession do not share.
c) Solicitors
Whilst having the advantage of looking at different types of contracts which
we prepare for our clients we should be well placed to see what is important.
I am sure you will have heard from friends within the profession the comment
“Do you remember that partnership agreement that you prepared for me five,
ten, fifteen years ago?” When one hears that one can almost anticipate
that there will be difficulties within the partnership.
There are two really useful purposes for such an agreement:-
Agreements must deal with critical matters such as profit sharing but always
bear in mind that you can do anything by agreement. If profit sharing arrangements
are unfair there is nothing to prevent partners with a larger share agreeing
that the share of the junior partner should be increased retrospectively.
When you come to draft the clauses which regulate termination of a partnership
a balance has to be struck between the interests of the practice and those
of the individual.
1. How long should the partnership agreement last?
I am of the view that should not be for a fixed term but should provide that they are terminable at any time subject to a suitable period of notice specified in the agreement. It is pointless to try to keep people together once they are in dispute.
2. What should the effect of a notice be?
Some agreements provide that if a partner gives notice other partners have the opportunity of buying him out. But what if all of the partners are unhappy with one particular partner? Should they be able to put him out and acquire his share in the partnership? Should the intention be to protect the individual or the practice itself? Should there be special protection for the partner who is indisposed.
3. Restrictive Covenants.
If a partner leaves should there be restrictions on where he may go? Personally I believe one should never attempt to deprive a fellow professional of the ability to make a living and a restrictive covenant should not be necessary in legal partnership agreements.
4. Termination of partnership.
It is difficult to bring a partnership to an end without at least some unhappiness. It should be possible to avoid unnecessary friction, which is in the interest of no one. Litigation between warring former partners is far too common. What should one do? There should be agreement in the partnership contract for termination on a suitable period of notice but it is much better if one talks the thing through and reaches agreement as amicably as possible.
Parties must take independent advice and mediation to which reference will be made should be possible. The type of medication/advice will vary depending upon the nature of the matters in the dispute but a suitably qualified and experienced Chartered Accountant can be invaluable. Even if you think that your client is in the dominant position, avoid going for the jugular. It is a serious mistake in any negotiation to adopt such a dominant position that you frighten the opposition. A frightened person is a dangerous person and the worse sort of negotiations are carried out in that atmosphere.
The structure of the partnership is important but this requires to be appropriate
to the size of the organisation. If you are in a large practice with a well
established hierarchy of committees or have a chief executive or managing partner
then you may be expected to play a particular role. By the same token if you
are in a small firm very often the buck stops with you in any event.
For the small to medium size partnership a variety of structures are possible.
It is important to create harmony to find out what suits people best and to
make sure everybody understands the role they have to play.
I consider these essential so that people are informed regarding the administration
of the partnership. People should not expose themselves to the risk of partnership
without having a reasonable measure of control over their destiny. Partners
should have access to key information concerning the partnership and participate
in the decision making processes or agree to the level at which such decisions
are taken. All power must ultimately be delegated by the partnership if it
doesn’t exercise it directly itself. It may seem entirely obvious, but
it has not always been the case. If one looks at the case of Archibald Sharp
-v- The Law Society 1984 SLT 313 you will appreciate the difficulties which
can arise. In that case Lord President Emslie said “The actings of the
four senior partners were not open to question by the more junior partners ….
they had a limited opportunity …. to supervise and influence the administration
of the firm …. the salaried junior partners indeed were excluded from
partnership meetings”.
Partnership meetings are there to enable discussion upon the extent to which
powers and responsibilities should be delegated to certain partners or committees
of partners and others but one should always have an agenda reflecting the
various areas of responsibility of committees etc. You will have committees
dealing with finance, personnel, property, equipment, marketing and each of
these will appear as a section of the agenda with various sub-headings for
individual items of important discussion.
It is essential to ensure that partners understand their role. If one is
establishing a committee to carry out functions such as personnel there should
be a written remit. For example will the partner or the committee of partners
have power to hire and fire, establish wage rates and discipline staff or,
does it only have power to replace existing staff at similar rates of pay.
Reporting mechanisms are required.
The Law Society imposes requirements including the need for a cash room designated
partner, a compliance partner for the purposes of Investment Services, a Money
Laundering Compliance Officer, a complaints partner, although that is not a
statutory requirement but is expected by The Law Society and finally a partner
to sign the Partnership Tax Return.
Becoming and being a partner in a professional firm provides hopefully
far more opportunities than problems in the years of practice. It also provides
opportunities that need to be grasped.
I now recommend that there is a supplementary minute of agreement attached
to any partnership agreement which the partners can accept and sign up to.
Generally it covers management strategy and budgeting. It is to allow the firm
to develop its own management style, to create an overall financial strategy
to be contained in a financial plan which should be reviewed as frequently
as required and to enable all decisions of the partnership to be taken against
the background of the plan and decisions should not be taken until the financial
consequences, as highlighted by changes to the plan, have been considered.
In other words the partners agree to adopt a management strategy and to implement
the terms of a budget for a particular financial year.
This means that you deal specifically in the minute of agreement, if necessary
year on year, with profits and losses, how they should be shared, with the
salaries for the salaried partners and any benefits they should obtain and
how motor cars will be dealt with. The supplementary minute should deal with
management issues e.g. as to who should be the managing partner, who should
be the financial controller, how often partnership meetings should be held
and how decisions are reached whether by unanimous decision or majority of
the partners in meeting. It should also deal with important matters such as
depreciation of assets and finally it should cover business activities of partners
outwith the legal practice. That was relevant when people were Temporary Sheriffs
for example and it is certainly relevant when people are non-executive Directors
of Health Boards or other non-Governmental Agencies or indeed hold positions
outwith the legal practice in plc’s and the like. For the avoidance of
doubt there should also be reference to any interest that a partner has in
a business separate from the partnership and therefore should be specifically
excluded from the general clause within a partnership agreement indicating
that a partner’s whole time and attention should be devoted to the business
of the partnership.
Finally, so far as a contract of partnership is concerned what should it contain?
Generally the layout of my partnership agreement runs as follows:-
Clause First - The firm name and place of business or places of business.
Clause Second - The endurance of the agreement. Should the partnership be dissolved by written notice given by a certain number of the partners or by a senior partner to others at least six months prior to a date in any year. What effect?
Clause Third - Capital. This clause deals with the initial capital of partnership and what occurs when people are introduced into partnership.
Clause Fourth - This clause deals with profits and losses.
Clause Fifth - Deals with the books and accounts.
Clause Sixth - The use of the firm name and bank accounts.
Clause Seventh - The time and attention to be devoted to the business.
Clause Eighth - Deals with pension and insurances as generally partners should retain personal accident insurance, permanent health/sickness insurance, medical expenses insurance and such term assurance policies as the partners may agree amongst themselves.
Clause Ninth - Deals with decisions where in default of unanimous agreement a simple majority rules and in the event of equality a senior partner shall have the casting vote.
Clause Tenth - Deals with prohibited acts.
Clause Eleventh – Expulsion with specific definitions contained therein of prohibited acts which could lead to expulsion.
Clause Twelfth - Deals with retirement.
Clause Thirteenth - Deals with continuance of the partnership.
Clause Fourteenth - Payments on death, expulsion or retirements.
Clause Fifteenth - Dissolution by notice.
Clause Sixteenth - Will deal with the final dissolution of the partnership if the partners do not agree or otherwise the whole assets of the partnership will be divided under the supervision of the accountants of the partnership for the time being having been realised to best effect.
Clause Seventeenth - Is a restrictive covenant clause which I do not recommend which some firms demand.
Clause Eighteenth - Will deal with professional indemnity claims or claims for compensation. There generally must be agreement as to how acts or omissions giving rise to a claim will be dealt with and who shall suffer the cost thereof or indeed the uninsured element of any claim.
Clause Nineteenth - Holidays.
Clause Twentieth - Maternity clause making it clear that a partner by reason of pregnancy is entitled to have a minimum of thirteen weeks leave from the business and how that should be paid for.
Clause Twenty First - Interpretation of the contract.
Clause Twenty Second - A short arbitration/mediation clause.
Clause Twenty Third - Registration.
These comments relate specifically to those partnerships
which exist and function without the benefit of any contract regulating the
relationship. There are far more of these than people surmise and it does lead
to extraordinary problems when profit sharing partners fall out and the potential
for disruption of the partnership occurs.
Since no fixed term for the partnership is agreed and there is no written contract
it is a partnership with no fixed term, having been entered into for an undefined
time. Section 26 (1) of the Partnership Act provides that where there is no
fixed term agreed upon for the duration of the partnership any partner may
determine the partnership at any time on giving notice of his intention to
do so to all other partners.
Section 32 (C) provides that subject to any agreement between the partners, a partnership is dissolved, if entered into for an undefined time, by the partner giving notice to the other or others of his intention to dissolve the partnership.
Section 25 provides that no majority of partners can expel any partner unless the power to do so has been conferred by express agreement between the partners.
Accordingly in the absence of any agreement to the contrary any partner of
the firm is entitled to dissolve it at any time. The majority of partners cannot
dissolve the partnership by expelling the other since there is no express agreement
that they may do so.
I have already set out in my general paper the definition of partnership property
but of course on a break up work in progress is an important asset and the
approach taken by Lord Penrose in the case of the The Council of The Law
Society -v- McKinnie 1995 SCLR 537 discloses good argument that work in
progress is an asset.
If the partnership is dissolved what happens to the assets of the partnership
and who may use them?
Partners of a dissolved firm may agree about the use of firm’s assets
and the continuation of its practice. If there is no agreement then each partner
is entitled to insist that the assets of the firm are sold and the proceeds
applied in accordance with the scheme contained in Section 44 of the Partnership
Act.
All partners have an interest in the entirety of partnership property since
partnership property is held by the partners jointly for the use of the partnership.
No partner has the right to any particular asset to the exclusion of the others.
This applies during the currency of the partnership and upon dissolution thereof.
Section 39 provides that every partner is entitled on dissolution of the partnership to have the property of the partnership applied in payment of debts and liabilities of the firm and to have the surplus assets applied and payment of what may be due to partners respectively after deducting what may be due from them as partners of the firm.
Accordingly if certain partners wish to continue the business utilising assets
of the business they can only do so with the consent of all. Any one partner
is entitled to insist that the affairs of the partnership are wound up, assets
realised, liabilities discharged and balance distributed.
I have to say that partnership law states that the effect of presumption of
sale is not absolute even if one partner insists that the affairs of the partnership
are wound up and assets realised etc. A court will always do what is fair and
just. In my experience courts require compelling evidence of the impracticality
of sale of assets including goodwill before a court would be persuaded to deprive
any outgoing partner of his right to test the value of assets by means of a
sale on the open market.
Section 38 provides that partners of a dissolved firm have continuing authority to bind the firm and to continue the rights and obligations of the partners as trustees so far as may be necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished as at the time of dissolution.
Accordingly if you are acting for a partner who is being excluded from the
day to day operation of the business and treated as a pariah in a partnership
at will my general advice is that unless matters can be resolved between the
partners by agreement or by mediation then partners have to recognise that
there is a dissolution and that an unequivocal notice under Section 32 (c)
or Section 26(1) is served.
Thereafter an independent accountant should be appointed and provided with
a mandate to wind up the firm, that the assets are sold, that goodwill if capable
of being realised is sold, the files are distributed to ensure that clients’
interests are protected subject to the obligation of the Trustees of the dissolved
firm to account for the value of work in progress in each file to date of dissolution
with a duty to account for the recoverable outlays to date of dissolution and
that the Bank Accounts are operated with care. The Client Account must remain
open to comply with the Solicitors Accounts Rules. If the firm is dissolved
one must satisfy the Chief Accountant of The Law Society that that Client Account
can be operated appropriately with proper supervision to comply with Solicitors
Accounts Rules 1997. The Firm Account, which may be in overdraft, is generally
suspended and a Money Management Account created to enable the Accountant or
whoever is mandated with the duty to wind up, to ingather and apply according
to the provisions of the Partnership Act. The Client Account should be operated
to enable transaction begun but unfinished as at the date of dissolution to
be completed and accordingly that account must be supervised on a day to day
basis. Matters then have to be intimated to all interested parties including
The Law Society, Customs & Excise and Inland Revenue. A properly framed
Minute of Dissolution is absolutely necessary to ensure an orderly winding
up.
If there can be no agreement what are the other options available to a partner
who feels that he or she is not obtaining justice? There is the remedy of Court
to seek Interim Orders, to ensure that other than in so far as it is necessary
for the purpose of winding up to Interdict other partners from purporting to
carry on in any manner the business of the now dissolved firm with its name
and from intromitting in any with any property or asset of the dissolved firm.
If that fails then the response is a Petition to seek the appointment of a
Judicial Factor. – Some call that the Nuclear Option.
In a partnership at will such a Petition discloses that a Notice of Dissolution
has been served, that the Notice was effective. The pleadings generally suggest
that the firm has a substantial client base with significant work in progress,
that the firm operates bank accounts, it possesses goodwill, the firm name
is a valuable asset, and it is therefore necessary for the proper winding up
following dissolution that these assets be ingathered, preserved and valued
in order that the firm can be wound up. It is usual to aver that despite efforts
since notice was served the parties cannot reach agreement as to the ingathering,
preservation and valuation of the assets and property and there is material
risk to those assets. If it is impossible to begin the process of winding up
then you should aver what the others have been doing to the detriment of your
client. Often someone is excluded from the premises and then the door locks
are changed, that clients continue to be seen, that business is conducted,
that the others have control of the client account, other Bank Accounts in
the firm name and client files. There is generally then material risk that
someone is wrongfully intromitting with the assets and may be dissipating partnership
estate and accordingly the petitioner is under the necessity of presenting
the application for the appointment of a Judicial Factor in the estates of
the firm to secure the proper and expeditious winding up and you suggest to
the Court a suitable person to be appointed to bring the affairs under judicial
control without delay and that the appointment is therefore necessary ad interim
and expedient. The application can be made at common law or under Section 39
of the Partnership Act.
The Schedule for Service will disclose the names of the respondents upon whom
service is sought in common form.
Courts are slow to grant these but you can see that the threat of the appointment
of a Judicial Factor is generally sufficient to bring parties to the table
to negotiate and from that a Minute of Retiral or Minute of Dissolution can
be framed which sets out a mechanism for settlement. What of the Minute of
Retiral which I now deal with? I will turn to the dissolution document finally.
The retiral package has to be the subject of detailed negotiation. My style
is to have a preamble with the parties disclosing exactly the retiral date,
what the agreement regarding the others continue the business is, confirming
what happens to the business name and assets, that the outgoing partner will
be relieved of all and any liabilities arising under or in terms of any obligations
and indebtedness, that there should be a mechanism for establishing your client’s
balance and retiral payment by reference to accounts, that tax liability is
dealt with, that work in progress is properly dealt with if that forms part
of the settlement, furnishings, books etc, professional indemnity is absolutely
essential to be covered particularly by reference to professional indemnity
insurers, how employees are dealt with since there needs to be confirmation
that the others will continue the Contracts of Employment and free and relieve
your client of any liability in respect of the employment of staff howsoever
arising. There should be reference to profit in the period to the retiral date,
you should deal with all property matters particularly where property is owned
separately by certain of the partners. There needs to be agreement on announcements
in the Journal of The Law Society and the Edinburgh Gazette, there needs to
be confidentiality on matters relating to the Minute and there should be an
arbitration/mandate clause should there be a continuing dispute.
Attached to the Minute of Retiral is generally a number of Schedules dealing
with Client Lists, more particularly a letter in agreed terms to go out to
clients explaining what has happened, to present change in best light and to
allow the outgoing partner to contact his clients. Generally there is a further
Schedule dealing with books and papers, furnishings and equipment and the form
of notification that should be made to The Law Society etc.
A Dissolution document is quite different, that is where the parties agree
dissolution and they agree a date for it. There must be a clause allowing authority
to bind the firm in so far as necessary to wind up the affairs of the firm
and complete transactions begun but unfinished as at the date of dissolution.
There must be agreement as to the style of Notice of Dissolution to be advertised.
There must be agreement that the parties will give effect to Section 44 of
the Partnership Act which allows parties to realise the assets, discharge the
liabilities, make due provisions to cover claims and to apply surplus assets
and monies representing the same as provided for by terms of the said Section.
Generally I provide a mandate to a named Chartered Accountant to be instructed
in terms of a detailed letter of instruction to ingather and to receive payment
and generally to do all things necessary to ensure a proper ingathering of
assets and a proper disposal of same. The Dissolution must be intimated to
all relevant authorities including the Inland Revenue and Customs & Excise.
The Accountants will be instructed in terms of a further letter to draw up
accounts reflecting the dissolution of the firm and they should be prepared
within a short time frame, say six weeks. The Accounts should be intimated
simultaneously to all parties who will be entitled to make representations.
Generally I set a strict timetable regarding the representations and allow
the Accountants to be the final arbiter and to deem the accounts as final having
taken into account the representations. There should be a specific clause dealing
with Tax liability to be settled by the Accountants out of funds recovered
and then there is a clause dealing with the files and how valuation of the
files in relation to work in progress to the date of dissolution is calculated.
The Scottish Legal Aid Board needs a separate Schedule ensuring payment of
monies due to the firm to be mandated to the Accountant. Termination of staff
contracts requires to be carried out in discussion with the Advisory, Conciliation
and Arbitration Service so that redundancy is paid properly. I generally have
a clause which indicates that no one can use the name of the firm or indicate
that they were formerly of the firm. You then have to deal with the unbilled
work and assess that and have a system for making sure that the debit balances
are repaid by those responsible for the files and then deal specifically with
professional indemnity.
The Schedules to such a dissolution document can be lengthy and will contain
the style of Notice of Dissolution, the letters to the Accountant with the
instructions in connection with the ingathering and winding up, a further letter
to the Accountants, (and they may be different accountants to those who prepare
the Accounts) dealing specifically with the Dissolution Accounts. There needs
to be letters to clients as can be agreed and there needs to be list of those
clients whose files will be taken by individual partners with a duty on those
individual partners to account for work in progress. There needs to be a general
letter going out to all interested parties, Banks, Law Society, Inland Revenue
etc explaining the position and if it is a Legal Aid Practice a letter to the
Legal Aid Board explaining that any payments to be made in connection with
work commenced but unfinished will be paid over to the nominated Accountant.
The problem with mandates is dealt with by The Law Society in terms of guidance
issued to the profession.
see also:
Resolving Partnership Disputes
Partnership Problem Solving
List of Cases
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