Termination of the Business

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Chapter 11

Termination of the Business

11.1 GENERAL PARTNERSHIPS
11.1.1 Dissolution

Dissolution marks the legal end of a partnership. If the business is genuinely to come to an end or to be sold to a third party (sometimes referred to as a total dissolution), the assets will be collected, the debts paid and any surplus distributed to the partners. Alternatively, it may be that one or more of the partners are to continue the business (sometimes referred to as a partial or technical dissolution). In this case the continuing partner(s) will buy out those who are leaving, and carry on the same business as a sole trader or partnership.

A partnership may be dissolved in a number of ways.

11.1.2 Non-judicial grounds for dissolution

Subject to contrary agreement, a partnership is dissolved without the involvement of the court in the following situations (ss 32–34 of the Partnership Act).

Partnership ‘at will’

If no contrary agreement as to duration has been reached, the partnership is ‘at will’ (s 26(1) of the Partnership Act). This means that it continues indefinitely, and any partner may dissolve the partnership by giving notice to all other partners (ss 26(1) and 32; see also 9.1.5). It is advisable for the notice to be in writing so as to reduce the possibility of future disputes as to whether it was properly given. Although it is possible to include in the partnership

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agreement a provision specifying a notice period, so that the dissolution cannot occur without prior warning, a partnership which has a comprehensive agreement is more likely to provide that notice of departure does not trigger dissolution.

Fixed term or purpose

If the partnership is formed for a fixed period of time or purpose, it will dissolve automatically at the end of the specified period or purpose unless the partnership is, in fact, continued (s 32 of the Partnership Act). In the latter case, the partnership will be governed by the old terms, unless new terms are agreed (s 27), and if no new agreement as to duration is reached, it will be a partnership at will (see above). In Chahal v Mahal and Deol¹(see also 2.1.1), the court held that the partnership was for the duration of an undertaking, namely the operation of a particular caravan site, and that it was dissolved by implied agreement when that site was sold.

Other events

The death or bankruptcy of a partner will automatically dissolve the partnership in the absence of contrary agreement (s 33(1) of the Partnership Act).

A partnership may be dissolved, at the option of the other partners, if a partner’s share is charged to pay a private debt (s 33(2) of the Partnership Act).

Illegality, whether of the business or the partnership, will result in dissolution (s 34 of the Partnership Act). This may not be varied by agreement. It may be that the business is unlawful, or that it was formed illegally. In Everet v Williams,²a claim by one highwayman against another for his share of profits was dismissed because the business was illegal. In Hudgell, Yeates & Co v Watson,³one partner in a firm of solicitors failed to renew his practising certificate and therefore could not legally practise as a solicitor. It was held that the partnership dissolved at the date on which the certificate lapsed. Since the other partners continued to practise, a new partnership was constituted by conduct (and excluded the former partner who could not legally practise).

¹Chahal v Mahal and Deol [2004] EWHC 2859 (Ch), [2004] All ER (D) 190 (Sep).

²Everet v Williams (1725) noted in (1893) 9 LQ Rev 197.

³Hudgell, Yeates & Co v Watson [1978] 2 All ER 363.

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Similarly, in Stevens and another v Bower,⁴one of two partners in a firm of solicitors was struck off the roll of solicitors. The EAT held that the result of s 34 was that the partnership was dissolved when he was struck off.

However, a partnership will not dissolve merely because the business could be carried on illegally. In Dungate v Lee,⁵a partner in a firm of bookmakers had not obtained the permit necessary to carry on bookmaking. However, the court held that the purpose of the partnership was not illegal and, as a permit was only required by those partners actually engaged in bookmaking, the partners were not necessarily breaking the law. The partnership had therefore not been automatically dissolved.

In Hurst v Bryk⁶(see also 7.1.6 and 9.1.4), Lord Millett, who gave the leading judgment, opined that acceptance of a repudiatory breach of the partnership agreement (which he held did not enable the accepting partner to avoid liabilities already incurred) should not automatically dissolve the partnership itself. In Mullins v Laughton,⁷where this issue arose for decision, the court adopted this approach, and Mullins was followed in Golstein v Bishop⁸(see also 9.1.4).

11.1.3 Judicial grounds for dissolution

Given the extensive grounds for dissolution without court involvement, judicial dissolution is rarely necessary. However, it may be required if one or more partners (but not all, since the partners acting unanimously could simply alter the agreement) wish to dissolve a partnership for a fixed purpose or term, or a partnership at will with an agreed notice period, before the purpose is achieved or the term or notice period has expired.

The grounds on which the court may dissolve a partnership are as follows (s 35 of the Partnership Act):

• permanent physical incapacity of a partner (s 35(b)) (although, in practice, it may be preferable for the agreement to specify either

⁴Stevens and another v Bower EAT/1076/02 SM, [2003] All ER (D) 143 (Sep).

⁵Dungate v Lee [1967] 1 All ER 241.

⁶Hurst v Bryk [2000] UKHL 19, [2002] 1 AC 185.

⁷Mullins v Laughton [2002] EWHC 2761 (Ch), [2003] Ch 250.

⁸Golstein v Bishop [2013] EWHC 881 (Civ), [2013] Ch 131; [2014] EWCA Civ 10, [2014] Ch
455 at [10].

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optional or compulsory retirement without dissolution if the incapacity lasts beyond a specified period);

• conduct of a partner which is prejudicial to the business (s 35(c));
• wilful or persistent breach of the agreement (whether written or otherwise) by a partner (s 35(d)) (the ground unsuccessfully alleged in Lie v Mohile⁹);

• the business can only be carried on at a loss (s 35(e)) (which must not be merely temporary);

• in the opinion of the court, it is just and equitable that the partnership be dissolved (s 35(f)).

Petitions on the basis of s 35(b), (c) or (d) must be brought by a partner other than the incapable or defaulting partner. Petitions on the basis of s 35(e) or (f) may be brought by any partner.

In addition, the Court of Protection may order the dissolution of a partnership where a partner lacks mental capacity in relation to a matter or matters concerning his property and affairs (ss 16 and 18 of the Mental Capacity Act 2005). A person lacks capacity in relation to a matter if at the material time he is unable to make a decision for himself in relation to the matter because of an impairment of, or a disturbance in the functioning of, the mind or brain (s 2). The incapacity may be permanent or temporary (s 2).

11.1.4 Dissolution procedure

If dissolution is automatic pursuant to the Partnership Act or a partnership agreement, no further action need be taken to dissolve the partnership unless the agreement so specifies. If judicial dissolution is required, then the procedure is as set out in 10.1.2.

In all cases, a partner may publicise the dissolution and can require the other partners to agree to any act necessary for this...