Partnerships
Disputes between partners, dissolution, partner exits and dividing assets under NSW partnership law, plus disputes between company co-owners.
A partnership is the relationship between people carrying on a business in common with a view of profit, and in NSW it is governed by the Partnership Act 1892 (NSW) whether or not there is a written agreement. Vamp Law acts in disputes between partners, dissolutions, partner exits and the division of partnership assets, and in disputes between co-owners who trade through a company.
What is a partnership under NSW law?
Under the Partnership Act 1892 (NSW), a partnership is the relation which exists between persons carrying on a business in common with a view of profit (s 1). No written agreement is needed. A partnership can arise from the way people actually run a business together, and receiving a share of the profits is evidence that a person is a partner, although it is not conclusive on its own (s 2).
People are sometimes partners without realising it, and sometimes believe they are partners when the law treats the arrangement as something else, such as a loan repaid out of profits. Vamp Law acts for partners in disputes with each other and for partners leaving a firm.
Why does a written partnership agreement matter?
Because without one, the Act fills the gaps with default rules that may not suit the business. Section 24 sets out those rules, including:
Equal shares
partners share equally in capital and profits, and contribute equally to losses.
Management
every partner may take part in managing the business.
No salary
no partner is entitled to remuneration for acting in the business.
New partners
no one can be introduced as a partner without the consent of all existing partners.
Those defaults can surprise a partner who contributed most of the capital or works full time. An agreement should also cover how a partner leaves, how their share is valued and whether the business continues.
What duties do partners owe each other?
Partners owe each other duties of good faith and loyalty, which the courts treat as fiduciary duties, alongside specific duties in the Act. Each partner must render true accounts and full information about the partnership to the others (s 28), must account for any benefit obtained without consent from a partnership transaction or from using partnership property, the firm's name or its business connections (s 29), and must pay over to the firm the profits of any competing business run without consent (s 30).
These duties do not end the moment a partnership breaks up. In Chan v Zacharia (1984) 154 CLR 178, the High Court held that a partner who obtained a new lease of the partnership premises after dissolution, but before the partnership's affairs were wound up, held it on constructive trust for the partnership. The rules of equity continue to apply to partners except where the Act says otherwise (s 46).
Are partners personally liable for the partnership's debts?
Yes. Every partner is liable jointly with the other partners for all debts and obligations of the firm incurred while they are a partner (s 9). Each partner is an agent of the firm, so what one partner does in carrying on the business in the usual way binds the others (s 5), and the firm is liable for loss caused by a partner's wrongful act in the ordinary course of the business (s 10).
Retiring does not end that exposure by itself. A partner who leaves remains liable for debts incurred before retirement (s 17(3)) unless released by an agreement involving the continuing partners and the creditors (s 17(5)). People dealing with the firm can treat apparent partners as still being members until they have notice of the change (s 36), so a departing partner should notify clients and suppliers.
How is a partnership dissolved and wound up?
Subject to any agreement, a partnership is dissolved when a fixed term expires, when a single venture ends, or, for a partnership of undefined duration, when any partner gives notice (s 32). The death or bankruptcy of a partner also dissolves it, again subject to the agreement (s 33). A court can order dissolution on grounds including wilful or persistent breach of the agreement, conduct prejudicial to the business, a business that can only be carried on at a loss, or where it is just and equitable (s 35).
On dissolution, any partner can apply to the court to wind up the business and have the partnership property applied to its debts (s 39). Unless the partners have agreed otherwise, s 44 sets the order in which the assets are applied:
Outside creditors
The firm's debts to people who are not partners are paid first.
Partner advances
Each partner is then repaid money advanced to the firm beyond their capital contribution.
Capital
Each partner is then repaid their capital.
Residue
Anything left is divided in the proportions in which the partners shared profits.
What happens when one partner leaves?
In a partnership with no fixed term, a partner can end the partnership by giving notice to the others (s 26), and unless the agreement lets the business continue, that notice dissolves the partnership as a whole. Many agreements instead let the continuing partners buy out the leaving partner, and the buy-out and valuation wording is often where the real dispute lies.
Subject to the agreement, the amount owed to an outgoing partner for their share is a debt arising at the date of dissolution (s 43). Unless the agreement says otherwise, if the remaining partners keep trading with the firm's assets without settling accounts, the outgoing partner can elect to receive either the share of later profits the court finds attributable to their share of the assets, or interest at six per cent a year on it (s 42).
What if business partners trade through a company?
Many business partners actually own a company together, and the Partnership Act does not apply to members of a company (s 1(2)). Their rights come from the company's constitution, any shareholders agreement and the Corporations Act 2001 (Cth).
Where a company's affairs are conducted in a way that is oppressive to, unfairly prejudicial to or unfairly discriminatory against a shareholder, or contrary to the interests of the members as a whole, the court can make wide-ranging orders, including that one shareholder buy another's shares or that the company be wound up (ss 232 and 233). A member can apply (s 234), and a court can also wind up a company where it is just and equitable to do so (s 461(1)(k)). This page is general information, not advice on a particular business: the right course depends on the facts and the documents.
Frequently asked questions
Yes. A partnership exists wherever people carry on a business in common with a view of profit, whether or not anything is in writing. Without an agreement, the default rules in the Partnership Act 1892 (NSW) decide questions such as how profits are shared and how the partnership ends.
Generally yes, if it is a debt of the firm incurred while you were a partner, because partners are jointly liable for the firm's debts. A partner's separate personal debts are a different matter.
While still a partner, anyone who runs a competing business without consent must pay the profits over to the firm. After leaving, it depends on whether the agreement contains a valid restraint, and a NSW court can read down a restraint that goes further than is reasonable under the Restraints of Trade Act 1976 (NSW).
Usually not. Co-owners of a company are shareholders, so the company's constitution, any shareholders agreement and the Corporations Act 2001 (Cth) govern the dispute rather than the Partnership Act.
Speak with Vamp Law about a partnership dispute
If a partnership is breaking down, or you are planning to leave one, make an enquiry or call +61 431 569 686 to speak with Kyra Pastrovic. For wider business disputes, see commercial litigation.
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