Spencer Laymond is a company lawyer with Curwens Solicitors. He sets out here his seven reasons why you may not need a partnership agreement and save yourself the money.

This may seem an unusual headline.  Why would you not want or need a partnership agreement? After all, isn’t it common sense? If you are in business with someone, shouldn’t you have a written partnership agreement? Surely it would be bad practice not to have a partnership agreement, especially if cost was not an issue?

Well, without giving the game away early, yes, if you are in business with other people, then there really should be some agreement in place setting out the expectations and exit strategy.  Yes, there will be a cash investment, in order to prepare a suitable partnership agreement but it can be dull reading explanations of things we know we should be doing, especially if it is the same old information, said the same old way. So we have turned this subject on its head, to make it a little more interesting and persuade a few more people, not only to take notice but also to take action.

We make one assumption – that you are in fact in partnership.  So here they are – seven reasons why you may not think you need a partnership agreement…

Reason 1 – You and your business partners are immortal 

If you and your business partners believe you will never die, will never suffer a serious accident or illness, or will never find yourselves incapable of continuing your role in the business (whether through age, mental capacity or otherwise), then, as much as you do not need an agreement to breathe, you may not need a partnership agreement regulating what to do if one of you should die.

If you want to check the law for yourself – the Partnership Act 1890, section 33(1) provides that a partnership is automatically dissolved on the death of any partner. That’s it. Without an agreement, on death of a partner, the business comes to an abrupt end.

But, if the death of a partner is not enough grief and aggravation, the business coming to an end itself sets a process in motion. When a partnership is dissolved, the dissolution means the start of a process of winding up. The process of winding up then disposes of the business, settling accounts with creditors and returning any surplus assets to the partners. At the end of the winding up, what once was the partnership business will be confined to history. Winding up can also give rise to unexpected and adverse legal and tax consequences.

So if you and your business partners are not immortal, the takeaway point is that there can be fatal consequences to the business, if there is no partnership agreement in place.

Reason 2 – It is reasonable for any one partner, at any time, to put the business into dissolution

Staying with the same doom and gloom theme of dissolution, if it’s perfectly reasonable for all the partners to walk around as if they have full and unrestricted access to a “button” which can be pressed at any time, a button which if pressed will kill the partnership immediately, irrespective of the circumstances and consequences to the business and other partners, then you may not need a partnership agreement.

If you want to check the law for yourself – Under the Partnership Act 1890, there are not one, but two sections that enable a partnership to be brought to an end by any partner at any time. These are sections 26(1) and 32(c). So, without an agreement, any partner, at any time, for any reason, can immediately trigger the dissolution of the partnership, and its winding up.

However, even if you and your partners have all the trust and confidence in the world in each other, even if you are family or lifelong friends, to protect the business, to provide some assurance in the event of a change in circumstances, a partnership agreement will be required.

Reason 3 – You and your business partners are happy to divide profits and losses equally, even if you have contributed different amounts of capital

Say, for example, you are in a three person partnership. Partner 1 has invested £10,000, partner 2 has invested £20,000 and partner 3 has invested £30,000. We are treating the investments as genuine capital contributions, in the sense that once the money has been invested in the partnership, it becomes permanently endowed to the partnership. The total capital invested is £60,000, of which partner 1 has invested 16.67%, partner 2 has invested 33.33% and partner 3 has invested 50%.  Each partner does exactly the same work and contributes exactly the same amount of the time to the business. Each year the business makes profits of £100,000, and each year all partners are happy to share the profits equally so that each partner receives £33,333.33. Equally if each year the business makes losses of £100,000, then the partners are happy to share the losses equally. If all partners are happy for the profits and losses of the partnership to be shared evenly, then you may not need a partnership agreement.

If you want to check the law for yourself, it’s section 24(1) of the Partnership Act 1890.  However, if you and your partners wish to share profits (or losses) in a way which reflects the original investments and perhaps different on-going contributions, then a partnership agreement will be required.

Keep in mind also that capital contributions may not be solely cash, but other property such as land and equipment. Whilst partnership accounts may make clear what assets are owned by the partnership and what assets are retained personally by an individual owner, there have been occasions where the courts have not accepted the evidence of the accounts – my third reason for a written agreement.

Reason 4 – It is reasonable for a majority of partners to oppress a minority of partners

Here we are concerned with the day to day management of the partnership business as well as its longer term direction. If you are a partner, you will automatically have a right to participate in the management. However, if you have no issue with your voice and opinion effectively falling on deaf ears and counting for nothing; if you have no issue with the seniors steering the ship as they please; if you have no issue with how decisions, big or small, are resolved, then you may not need a partnership agreement.

If you want to check the law for yourself – the Partnership Act 1890, section 24(5) provides that every partner is entitled to take part in the management of the business. Section 24 (8) then provides that differences on “ordinary matters” connected with the partnership business may be decided by a majority of partners.

The law being the law, the rules are subject to two exceptions, a few provisos and a qualification.

The exceptions:   There are two matters where even a minority partner has a veto. First, changes to the nature of the business, for example, going from software development to fish farming. Second, whether to admit a new partner – but that is about the sum of it so far as the statutory veto rights go.

The provisos:   All partners have a right to be heard; have a right to be notified of meetings; owe a duty of good faith to all partners; nevertheless, when it comes to voting, the minority can still be outvoted.

The qualification:   The rule is the majority decide “ordinary matters“, but what may be regarded as an ordinary matter in one partnership, may not be regarded as an ordinary matter in another partnership. So it is not just the number of partners voting for or against a matter that may count, but what the matter itself relates to. Is it an ordinary matter or not?

The point to takeaway here is that the Partnership Act creates scant protection for partners who find they are being oppressed by the majority. If this is acceptable then a partnership agreement may not be required.

If certainty and fairness are important, then a partnership agreement will be required.

Reason 5 – It is reasonable for a partner leaving the business to (a) freely take with them existing partnership clients (b) work for a local competitor (c) poach existing partnership staff

If the loss of clients and customers, if the loss of staff and other partners, and if the expansion of a local competitor business at the expense of your own business is of no concern to the partnership, then you may not need a partnership agreement.

 If you want to check the law for yourself, it will be a quick exercise. With the exception of a very few very limited and case specific examples, there is no law by default that provides any of these or other restrictions on partners. On the contrary, the law that there is on the subject, is law which provides for the framework as to whether any restrictions in an agreement are in fact enforceable, and whether restrictions are fair and reasonable to protect a legitimate business interest.

So if protecting your clients and customers, your staff and partners and if you do not want your competitors to get richer at your expense, are important, then a partnership agreement will be required.

Reason 6 – Even if a partner’s conduct is akin to gross misconduct, they are disqualified from their profession, they have committed murder, it is reasonable not to have a right to expel them

The principle of the partnership is “partners until death do us part”, so no matter what behaviour or scenario affects another partner, once in the partnership they have guaranteed membership for life, then you may not need a partnership agreement.

If you want to check the law for yourself – the Partnership Act 1890, section 25 provides that no majority of the partners can expel any partner unless power to do so has been conferred by express agreement between the partners.

If on the other hand you may be concerned with not having an effective remedy if a partner breaches an agreement, suffers prolonged mental or physical ill health, becomes insolvent, gets disqualified, ceases to hold relevant qualifications, neglects to perform his or her duties, is found guilty of a serious criminal activity or otherwise brings the partnership into disrepute, then a partnership agreement will be required.

Reason 7 – It is reasonable for one partner to take full responsibility for paying the debts and liabilities of a bankrupt partner

If your business partners all become bankrupt and the partnership has liabilities to pay, if those liabilities are either not covered by insurance or there is no insurance at all and you are happy to meet all the liabilities yourself, as your partners do not have the means, then you may not need a partnership agreement.

If you want to check the law for yourself – the Partnership Act 1890, section 9 provides that every partner in a firm is liable jointly with the other partners for all the debts and obligations of the firm.

Whilst there are some finer distinctions to this rule, the joint liability rule is a sound principle on a statutory footing.   Furthermore, keep in mind another consequence of partnership is that all partners are jointly liable for (a) wrongful acts and omissions of the other partners – in other words all partners are jointly responsible for the negligence of another partner; and (b) the misapplication of property or money received from third parties by one partner – in other words all partners being jointly responsible for another partner “doing a bunk” with a client’s money.

So if you don’t fancy being the “fall guy” and having to risk losing your home and jeopardising the financial integrity of your family assets, then a partnership agreement will be required. Moreover, depending on the nature of the business and availability of insurance, it may even be necessary to incorporate your partnership into a limited liability partnership (LLP); the subject of which is a blog for another occasion.

Concluding thoughts…

In conclusion, you may not need a partnership agreement and you can save yourself the money in having one prepared, if (and only “IF”) :

  1. You and your business partners are immortal;
  2. It is reasonable for any one partner, at any time, to put the business into dissolution;
  3. You and your business partners are happy to divide profits and losses equally, even if you have contributed different amounts of capital;
  4. It is reasonable for a majority of partners to oppress the minority;
  5. It is reasonable for a partner leaving the business to (a) freely take with them existing partnership clients (b) work for local competitor (c) poach existing partnership staff;
  6. Even if a partner’s conduct is akin to gross misconduct, they are disqualified from their profession, they have committed murder, it is reasonable not to have a right to expel them; and
  7. It is reasonable for one partner to take full responsibility for paying the debts and liabilities of a bankrupt partner.

However, if none of the above applies to you and you are in a partnership, then you really should consider putting a partnership agreement in place.

If you have any questions relating to this blog then please contact Spencer Laymond, our company law specialist either by email at mailto: spencer.laymond@curwens.co.uk or by telephone on (020) 8363 4444.

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PRE-NUP – WHAT’S THAT ? DO I NEED ONE ?

With the romance of Valentine’s Day now behind us, let’s talk again about the practical aspects of our relationships.

With the unavoidable increase in divorce and separation rates, it means that more of us who are getting married or moving in together are not “first timers“. Not only that, either one or both parties may have children from a previous marriage. This can mean ongoing financial ties to an ex-partner and possibly having a home or assets to bring into the new relationship.

So it’s  more important than ever for couples to take a small step back from the romance of their new relationship or wedding plans and think about the practicalities. If they are about to start living together, or planning to tie the knot, they should take legal advice on having a Cohabitation Agreement or Pre-Nuptial Agreement.

These don’t have to be long or complicated documents. The aim is to record what can be agreed amicably straight away, to cover what would happen if you ever did split up:-

  • Do you get to keep the property you brought into the relationship ?
  • Do you have to financially support one another after separation ?
  • How do you split anything held in joint names ?
  • Do you have to share any debts ?

The idea of considering a pre-nup early on is to avoid the time, anxiety and cost of a complex legal battle further down the line. Of course no-one has a crystal ball and your thoughts on how assets should be divided between you may change if you are married for many years, or if you have children together but in that case, no problem – you simply agree to review the terms of the Agreement on certain “trigger” events.

If you would like more information on having a Cohabitation or Pre-Nuptial Agreement drawn up please contact

Enfield:  

Vijaya Sumputh

0208 363 4444      vijaya.sumputh@curwens.co.uk

Hoddesdon/Royston:

Amanda Thurston 

01992 463727       amanda.thurston@curwens.co.uk

Curwens LLP is your local firm of solicitors offering you expert legal advice when you need it most.

Offices in Royston, Hoddesdon and Enfield.

www.curwens.co.uk

 

 

D-I-V-O-R-C-E – who gets what?

This month, I’m grateful to my colleague, Vijaya Sumputh, a specialist Family Law Solicitor at Curwens for her timely advice on the way some family assets are dealt with in divorce :

“According to a recent article in the Guardian, divorce enquiries are expected to rise more than 300% at the beginning of the year.  As Family Law solicitors, in this situation, we’re often asked the big question :  Who gets what?

The process of dividing the marital assets on divorce or family breakdown can be  emotional and complicated. What our clients want is a clear idea of what they may end up with at the end of this process, for example:

  • Who gets the matrimonial home?
  • Who gets the engagement ring?
  • Who gets the family pet?

Sadly, it’s not always possible to give a definitive answer to these questions, particularly in the early stages.

The Courts approach each case on its own individual set of facts – what might be right for one family, may not necessarily be right in all cases. The law in England and Wales is based on a discretionary regime which means there is a vast range of settlement options available in different circumstances.

There is no hard-and-fast rule, which is why it is important to take legal advice so that you have a better idea of the range of likely outcomes in your case.

Who gets the family home?

Often the family home is the biggest matrimonial asset and potentially the most emotionally significant one. Whether the house will end up being sold (and the net proceeds of sale divided) or transferred to one of the spouses, very much depends on the family’s needs.

In some cases, the family home may be kept by one spouse if that spouse is the primary carer for the children. Unless there is sufficient net equity in the property to re-house both spouses in a mortgage-free property, priority will usually be given to the spouse who needs to have the children living with him or her.

In some cases, the family home is kept by one party until a defined point in the future (such as when the children are all over 18) when the former family home can be placed on the market for sale at a price to be agreed by the parties (or if they can’t agree, as determined by a Court).

If, however, there are other assets that a Court can take into account, then one spouse may be able to retain the house permanently and pay other funds to the other person to “buy out” their interest.

When making any financial order, the court will look at a number of factors such as the length of the marriage, the age of the parties, whether they are working and what their earning capacity is, whether there are children, what each party’s needs are and what assets are available to meet those needs. It’s complicated, so do take legal advice.

Who gets the engagement ring?

The answer to this question can vary depending on whether the engagement ring was a family heirloom or perhaps inherited by one party. More often than not, engagement rings are retained by the wife to be passed down to one of the children.

As a general rule, the courts prefer chattels to be divided by agreement but if no agreement can be reached, the court can simply order all chattels to be sold and the proceeds divided.

Who gets the pet?

The family pet is mostly regarded as a member of the family but as the Courts will usually treat family pets much in the same way as any other chattel, we strongly encourage the parties to agree who will have responsibility for continuing to care for (and pay for) their family pet! ”

Vijaya Sumputh  –  0208 363 4444  –  Vijaya.sumputh@curwens.co.uk

www.curwens.co.uk

“Money, money, money – must be funny – in a rich man’s world…….”

We’ve all heard of pre-nups for the rich and famous but those of us who live more “ordinary” lives also should think about finances when going into a relationship and, sadly, if things start to go wrong – don’t let “heart rule head”.  I’m grateful to my colleague, Vijaya Sumputh, a Family Law expert at Curwens Solicitors, for her thoughts on this :

PROTECTING YOUR FINANCES FOLLOWING A RELATIONSHIP BREAKDOWN

Beginning a new relationship can often feel like entering uncharted waters. All you want to do is to live happily ever after with your new partner, but people often don’t consider what happens if the relationship ends.  A split can have a devastating emotional impact and financial uncertainty adds significant stress to an already difficult time.   A recent study suggests that as many as 2 million Britons are in debt because their ex-partner continued to spend after they’d separated – a “dirty separation trick” by a bitter “Ex”.

Married Couples

Here, the Court has the power under the Matrimonial Causes Act 1973 to split the debt between the two parties based on their financial needs and the Court may award more to the paying party including spousal maintenance to cover the repayments.

Unmarried Couples

There is no such protection for unmarried, cohabiting couples. In long term relationships, many couples set up joint bank accounts (even if marriage is not their immediate plan) to cover mortgage/rent and bills. This normally ends once the relationship comes to an end, because living with someone does not create a legal relationship.   So, if a couple has a joint debt and then splits up, both can end up being liable for the debt and one may be stuck with it if the other party doesn’t pay.  Unmarried couples must think about what happens to their investments if they split up – if the family home is to be sold, how will the proceeds be split ?

Protection

You can protect yourself by getting your solicitor to draft a “Cohabitation” or  “Living Together” agreement (also known as a deed) which sets out who pays what and what would happen to the assets if the relationship comes to an end, with a Declaration of Trust as to the ownership of the house.  You can also consider using Mediation or negotiation to resolve issues.

It may seem pessimistic to think about a relationship ending when you’re just starting out together, but on the other hand, a break up can be devastating emotionally, so a living together agreement helps with the practical issues, to reach a quick settlement.

If you think what I have described fits your circumstances, do give Vijaya a call for a no obligation chat on 0208 363 4444 or e-mail us at vijaya.sumputh@curwens.co.uk

If you die suddenly, who “minds the shop” ?

Certain business assets attract significant relief from Inheritance Tax at either 50% or 100% depending on the type of assets involved but what can be done on a more practical basis in order to protect your business and your beneficiaries, should the worst happen? Guest blogger and Wills specialist James Blakemore looks at the options.

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If you die, what happens to your business? It’s a big question whether you’re a sole trader, partner or director/shareholder. Your Will gives you the chance to reduce the risk of loss of profit, dissolution of the business, unbalanced shareholder control. Most importantly, it ensures your assets pass to those you want and that they get a fair value for them. Ask yourself :

1. Who gets the business assets or their fair value – your spouse, children, business partner or employees? Your Will is the only way to ensure that the rightful beneficiary receives their gift.

2. What about the day to day running of your business if you’re not there? How will the business cope without you? Your executors administer your estate but are they best qualified to actually run your business? If not, you can appoint separate executors to deal with the running of the business and give them wide powers of management. In effect, you can separate your personal and business assets to ensure that they are dealt with as you want and by those you trust to do the right thing.

3. What will happen to the business, your co-directors and employees? Would you want your business to be sold as a going concern or simply dissolved to achieve the best price? Many shareholder and partnership agreements include the right to allow other parties the first option to buy the shares or the assets of a deceased partner from their estate – however, many do not. As well as making your wishes legally binding in your Will you can also have a separate agreement with your business partners to deal with this.

Commonly referred to as a “Cross Option” or “Double Option Agreement”, it is used in situations where a shareholder or partner has passed away or is critically ill. If you believe that the business would be best served by its assets being retained by the remaining owners and/or employees, these agreements allow the assets to be offered first to the owners/employees and require your executors to do this.

If you want the business to continue and your beneficiaries to receive a fair price for the shares or other assets, this can set out the terms of the transaction. It would usually require each shareholder or partner to take out a suitable life and/or critical illness insurance policy, held in trust, to ensure that funds are available to purchase the business assets.

4. In relation to critical illness, what happens if you are unable to make decisions? Your executors will have no rights to deal with that as they are only appointed on your death. The answer lies in a Lasting Power of Attorney. You can appoint those you wish to deal with your property and financial affairs in circumstances where you can’t and also appoint those you trust to deal with different aspects of your affairs. Much like the appointment of separate executors, you can appoint different attorneys to deal with your personal assets and others to deal with business assets. You are also free to restrict or place conditions on their role.

Your Will ensures that those you want to benefit from your estate can do so, without the interference of outdated statutory rules. It is equally important to ensure that your Will reflects that both your wishes in relation to your business are carried out and offers comfort to your beneficiaries and business partners by ensuring that which you have worked so hard to achieve is not lost.

Can we help you? Our commercial and private client teams can advise on drawing up Cross Option Agreements, Wills, Trust Deeds and Powers of Attorney. Contact us today for more certainty. James.blakemore@curwens.co.uk or 01992 463727

Disputed Wills

DISPUTED WILLS

Because I deal with the misery which follows when either someone hasn’t made a valid Will or it’s failed or hasn’t provided for the family, I know how distressing it is. I also know how easy it is to avoid a mountain of problems by making a properly drawn Will using a qualified Solicitor. All too often though, I meet with very distressed family members who simply can’t understand why their loved one did not take this process seriously and think enough of them to make a proper Will. It seems to be a taboo subject, for some reason. Unfortunately, fighting over an Estate can be extremely costly (running into thousands of pounds) and, apart from the money, the dispute usually destroys the family, ripping them apart while they argue over the Estate assets. People get very angry and hurt about how they see they have been treated by the deceased. I even heard a story about two sisters who wanted to argue over the fur coat that their Mother had left to one of them. They were seriously considering spending huge amounts of money on legal fees to fight about that because they really felt so hurt. Of course I would never advise anyone to spend legal costs arguing over just a fur coat but there are cases where those left behind have not been properly provided for, perhaps a second family with valid claims for financial support which the deceased should really have thought about. My advice would always be to make a will as soon as possible – certainly if you have children and dependants who rely on you for financial support.