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Partnerships require a high level of trust in order to be successful. But what happens when your partner decides to withdraw partnership funds from the joint account without your permission? This article looks at what obligations partners owe to each other, and what steps you can take to recover funds withdrawn by a partner in New South Wales (NSW).

1. What Obligations Do Partners Owe Each Other?

A partnership is a legal relationship that you can enter into to run a business. Each partner is legally responsible for the debts and obligations of the partnership. Unlike a company, a partnership is not a separate entity.

People in a partnership owe particular duties to each other because of the high level of confidence and trust required between the partners. These duties are known as fiduciary duties. These include duties to:

  • 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.

If you have a partnership agreement with your partner, both of you must also meet your contractual obligations in the agreement.

If you do not have a formal agreement, the Partnership Act 1892 (NSW) governs how your partnership will operate.

2. How Can Partners Use Partnership Funds?

There are various sources you can look at to determine how you and your partner can use partnership funds.

The Contract

If you have a partnership agreement, look at what rights and obligations the contract sets out when it comes to how to withdraw partnership funds.

The Partnership Act

The Partnership Act states that all partners are entitled to share equally in the capital and profits of the partnership agreement.

This means that business partners share equally in the partnership funds. This is the case even if one business partner does much more work than the other

These rules will generally apply to your partnership unless you have a partnership agreement which says otherwise.

Fiduciary Duties

Partners must uphold their fiduciary duties whenever they withdraw partnership funds. Some questions you can ask to assess this include:

  • was the withdrawal made in good faith (i.e. without a dishonest motive)?;
  • did it result in the partner profiting personally (rather than profiting the partnership)?; and
  • were the partner’s actions transparent when using the funds?

Case Law

Various court cases have also laid down rules for how partnership money can be used. For example, a partner is indemnified for partnership expenses made with the other partner’s consent. Consent can be:

  • express, which means it is explicit and unambiguous (e.g. “Yes, you can withdraw $200 to buy office supplies”); or
  • implied, which means consent is assumed on the basis of certain circumstances (e.g. there may be management routines in the partnership that could indicate implied consent to particular actions).

However, this does not apply to fraud, illegal conduct or negligence in a partnership. If your partner engages in such conduct, they will not receive protection.

3. What Can I Do If My Partner Has Breached Their Obligations?

There are a number of steps you can take if your partner has withdrawn partnership funds without your consent, or breached other obligations.

Talk to Your Partner

Have you spoken with your business partner to discuss your mutual rights and obligations?  This is a vital first step to ensuring any funds taken unlawfully are paid back into the partnership accounts.

Engage a Mediator

Your business partner may be open to discussing the matter, but you may want to have an objective third party present. In this case, consider going to mediation. A mediator can help facilitate a constructive conversation.

Send a Letter of Demand

If a discussion is not possible or unfruitful, you may consider drafting a letter of demand. The letter should alert your business partner to their breaches of the partnership agreement and their common law and statutory duties. It can state that you may take action if the partner does not correct the breach within a specific time frame.

Ideally, a letter of demand will encourage your partner to rectify the breach so that you do not need to take matters further.

Go to Court

If your partner has breached their fiduciary duties resulting in a substantial and  quantifiable loss, a court may order the partner to:

  • provide compensation for loss suffered; or
  • account for profits and bring them back into the partnership.

However, court proceedings should be a last resort, as it may not be commercially sensible to pursue a court claim. You may end up spending a lot of money in proceedings, which you could have saved if you attempted to resolve the matter outside of court. If your dispute is over a relatively small sum of money, first ask yourself if you have made meaningful efforts to try and settle the matter.

The right ‘next step’ in your situation will depend upon the particular facts and circumstances of your partnership dispute. A lawyer can help you figure out how to resolve your matter in a way that keeps your goals in mind and is commercially sensible.

Key Takeaways

Business partners are personally liable for partnership debts and owe each other particular duties. These duties arise at common law, statute and in contract law if you have entered into a partnership agreement.

If you need assistance navigating your partnership, get in touch with LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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