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So you are in dispute with your business partner. As a result, they have locked you out the company accounts and removed you as a director or shareholder with ASIC. What can you do about it? This article will discuss a few common disputes scenarios between small business partners and how you can best navigate them.

The Typical Dispute 

Many small business disputes have similar characteristics, including a: 

  • breakdown of trust;
  • decision making deadlock; or
  • disregard for legal rights.

The commercial reality is that this type of dispute will often have to get resolved through negotiation

What Should You Do First?

From a legal perspective, you should always check the paperwork first. A few things to consider include: 

  • How is the business structured? Is it a company, or a partnership? 
  • If it is a company, do you have a shareholders agreement or company constitution? 
  • If it is a partnership, do you have a partnership agreement? 
  • Do you have access to those agreements?

Partnership or shareholder agreements are useful because they set out specific rights and obligations, and usually, a dispute resolution process to follow. If a company does not have a shareholders agreement in place, then the rules in the Corporations Act will apply.

What if There Is No Paperwork?

If you do not have any written agreements or if you no longer have access to them, there is still a way forward. This is because there are also general duties that apply under state and commonwealth legislation. The relevant duties are listed below:

Relevant Duties for Company Directors

Relevant duties for company directors Relvant duties for partners 
  • act with care and diligence;
  • act in good faith, in the company’s best interests and for a proper purpose; and 
  • not use the position of director improperly .
  • act honestly and in good faith; 
  • provide full accounts of all information and assets that are relevant to the partnership; and 
  • avoid profiting personally from partnership opportunities and information. 

As these duties are quite broad, most types of misconduct can fit within these definitions. It likely that you can make the case that your business partner has breached their legal duties to you and the business if they have:

  • locked you out of the business premises or online accounts;
  • taken funds or property owned by the business into their own possession; or
  • removed you as a director or shareholder with ASIC without your consent. 

What Can You Do About Illegal Conduct?

Technically, you can sue them. However, there are several reasons why this is not always a good idea: 

  • it is complex and expensive. Business breakups are often complex and messy. There are often many questions about who did what and when. As a result, they can be expensive to deal with in court;
  • there are limited remedies. If you see the matter all the way through to a hearing, there are only three main outcomes you can seek. Either you buy your business partner out, your business partner buys you out or the court orders that you wind up the business; and
  • the court will likely order mediation first anyway. Business or partnership disputes are usually heard in the Supreme Court or Federal Court. The Supreme Court spends most of its time on high profile claims, and as a result, they are likely to order that you go to mediation before the case can proceed to trial. This is an expensive and roundabout way to go to mediation.

These points demonstrate why it usually is not in either party’s interest to go to court in this situation. It is both expensive and time-consuming and usually does not achieve anything different to what you could achieve by negotiating or mediating yourself. 

As a result, in the context of small business disputes, the court should be a last resort. Certainly, if your business partner is refusing to engage, you may have no other option. It may be appropriate to engage a lawyer to send a letter at this point. Your lawyer will be able to help you demand access to the company’s documents and accounts again and persuade the other party to come to the negotiating table. 

Possible Resolutions

If the relationship is beyond repair, you will need to negotiate how you will split. Options include:

  • selling the business to a third party;
  • one of you buying the other out; or
  • winding up the company or dissolving the partnership and selling or dividing the assets, including intangible assets such as any intellectual property. 

It may be worthwhile to propose engaging (and sharing the cost of) an independent valuer to give you a point of reference point for negotiations. It may also help to engage a mediator to help cut through any emotion in the negotiations. Mediation is a good way to have a structured, solution-oriented conversation. Similarly, a lawyer can help you draft any letters, discuss strategy and help articulate a reasonable path forward.

Negotiating 

At the negotiation table, it is important to be smart about reaching a resolution. Can you structure the split in such a way that both parties get what they want (or what they think they want)? If your partner has an emotional attachment to a certain element of the business, such as the brand name, it may be best to let them have it rather than to fight. But be smart about what you ask for in return. For example, you may have social media pages with a lot of followers that you can rebrand or assets that could be repurposed. Also, be clear about what you want to achieve from the negotiation. For example, whether you want to continue running the business or whether you want to pivot into something else. 

Once you reach an agreement on general principles, it is a good idea to have a lawyer to draft a deed to capture all of the terms accurately. This helps you safeguard against future disputes.

Key Takeaways 

Small business disputes are difficult to resolve, particularly when there is a deadlock between directors or partners. It is important to be aware of your legal rights in this situation. However, going to court may not be the best way to resolve the business dispute. It is often more cost and time effective to negotiate a resolution yourselves with the help of third-party representation, mediators and valuers. Once at the negotiation table, think wisely about how you can negotiate a resolution that everyone is happy with, and that suits your long term business interests. If you require assistance with a business or partnership dispute, get in touch with LegalVision’s dispute resolution lawyers on 1300 544 755 or fill out the form on this page. 

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