Partnerships can fail for many reasons – incompatible personalities, poor business planning or failing to have a written partnership agreement. So what should you do when the partnership fails? We look at how a party can legally terminate a partnership including when an agreement is and isn’t in place.
Terminating a Partnership With an Agreement
A written partnership agreement is important because it clearly sets out how the business is run, who will do what, what happens if the parties get in dispute, and what happens if the parties need to dissolve their partnership.
Hopefully, you have a well thought out partnership agreement that covers all potential scenarios including if the parties need to dissolve or terminate the partnership. The agreement should also protect you against disputes or claims that may be made against you personally. If you need to dissolve the partnership, ensure that you notify all relevant persons/bodies, including:
- local governments;
- the Australian Taxation Office; and
- Your bank.
Terminating a Partnership Without an Agreement
Where a contract is silent, the governing law will usually apply to the partnership. The laws of the state where the partners made the agreement and in which the parties primarily carry on their business under the agreement will apply to the partnership. In New South Wales, the Partnership Act 1892 (NSW) (the Act) governs partnerships.
Division 4 of the Act provides how partners may dissolve a partnership. Relevantly, partners may dissolve a partnership (subject to any agreement or otherwise):
- by the term of the agreement expiring; or
- if no term is defined, then by one partner giving notice to the other of their intention to dissolve the partnership.
The partner must give the notice in writing. If the partner does not want to dissolve the partnership immediately, they should specify in the notice the date on which the partnership is to dissolve.
Where the matter proceeds to court, a court order can also terminate the partnership.
What are the Consequences of the Dissolution of the Partnership?
Under section 9 of the Act, each partner is jointly liable with the other partners for all of the business’ debts and obligations incurred while a partner.
Application of Partnership Property
Section 39 of the Act provides that upon dissolution, partners can have the property of the partnership applied to the payment of debts and liabilities of the business. This right exists against other partners.
You should always consult an accountant upon dissolution of a partnership. This consultation is to ensure you do not have any tax liabilities outstanding under the partnership, and that you have the appropriate statements prepared for your tax return. This is especially important if any of the partners sell assets of the partnership at any point in time while they were a partner.
A partnership agreement can provide you with a framework to dissolve your partnership amicably. If you don’t have an agreement in place, you will need to rely on the relevant Act in your state for assistance. If you need any assistance drafting or reviewing your partnership agreement or terminating your partnership, get in touch with our business lawyers on 1300 544 755.