Partnership – Law

The area of law concerns this case, which in connection with the relations of partners to one another, especially expulsion of partner and distribution of assets on dissolution of partnership.

Explain the principles of law

EXPULSION

Regarding expulsion, the Partnership Act says that:

“No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners.”

The power to expel any partner by a majority of the partners must be conferred by express agreement, for example for breach of the agreement or for bankruptcy. Without some specific clause in the partnership agreement to this effect, the only way to remove an objectionable partner is to dissolve the partnership or to include the partner to retire.

Because expelling a partner involves that partner in losing property rights, the partners’ power to expel must generally be exercised in good faith. An expelled partner may have a right to a fair hearing.

A partnership may be terminated where a majority of partners expels one of their number pursuant to the terms of an agreement.

Under s.35 of the Act two steps are necessary before this can occur.

Firstly, a clause must be inserted in the partnership agreement permitting such an expulsion;

Secondly, there must be a decision of the majority to expel the partner.

In Bond v Hale (1969) 2 NSWR 251 the Court applied a restrictive interpretation to the provision where the partners were not permitted to expel two partners under the same notice. In other words, if the partnership agreement only provides for expulsion of a “partner”, attempted expulsion of two partners by the other three for breach of the partnership agreement will be invalid as in breach of the partnership agreement.

It should be noted that this provision of the Act cannot be overridden by a contrary clause in the partnership agreement. Moreover, partners when exercising their rights under the provision must do so in good faith. Generally speaking the partnership agreement will give partners the right to expel if a partner has breached the agreement, or has behaved in a manner not consistent with his position as a partner (breach of fiduciary duties).

Distribution of assets on dissolution of partnership

Where a partnership is insolvent or where there is some doubt, s.57 of the Act deals with the question of losses and their apportionment. The concept of unlimited liability is that any losses incurred by the partnership must be met by the partnership itself and then by the partners. The presumption is that the partners will share the losses in the same proportion to which they are entitled to profits. This can be set aside by an agreement to the contrary as happened in the Canny Gabriel case where the partnership agreement was one which clearly contemplated a sharing of profits but no losses.

In a loss situation the order in which the debts of the partnership are to be met under s.57 are as follows:

– Debts and liabilities of the partnership to outsiders;

– Advances made to the partnership by the partners;

– Capital contributed by partners to the partnership;

– The residue distributed according to the proportion that profits were paid to the partners by the partnership

Difficulties arise where one partner is insolvent. In Garner v Murray [1904] 1 Ch 57 (“the Rule”), it was held that solvent partners could not be required to pay more than their own share of partnership losses. This is in accordance with the dictum, discussed previously, that partners are liable for partnership debts and obligations to the full extent of their personal resources. In saying this, however, it still does not detract from the fact the solvent partners are still responsible for meeting the losses borne by the partnership as a whole. The Rule seeks to provide an equitable method of meeting the insolvent partner’s share of the partnership’s losses without having to meet that partner’s capital deficit.

Apply the law

Although Mike made a loss for partnership —rectifying the design fault was estimated at $500000, no majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners. The power to expel any partner by a majority of the partners must be conferred by express agree, because expelling a partner involves that partner in losing property rights, the partners’ power to expel must generally be exercised in good faith. An expelled partner may have a right to a fair hearing. Under s.35, if the majority of the partners have a decision to expel Mike, there must have a clause inserted in the partnership agreement permitting such an expulsion. If not, they cannot expel the Mike.

On the other hand, s.57 of the Act deals with the question of losses and their apportionment. The concept of unlimited liability is that any losses incurred by the partnership must be met by the partnership itself and then by the partners. Firstly, $500000 should be paid by partnerships, and then by the partners. Partners are liable for partnership debts and obligations to the full extent of their personal resources.

Conclusion

It appears that if there is a clause inserted in the partnership agreement permitting such an expulsion; and majority of the partners have a decision to expel, Mike might be expelled, if not, they cannot. Moreover, Mike was liable for the debts and obligations to the full extent of his personal resources, after he contribute the capital for debts, the residue distributed according to the proportion that profits were paid to the Mike by the partnership.