Don't lose your partnership or LLP agreement through carelessness

Much time, care and, ultimately, expense is usually devoted to getting a UK firm’s partnership or LLP agreement into the shape that the partners want it. Frequently it will set out in detail the process for admitting new partners (such as signing a deed of accession), although this is sometimes omitted.

Ensuring that an incoming partner is bound by the existing agreement is an elementary precaution. The consequences of a failure to do so can be catastrophic.

In the case of a traditional partnership, the result may be the creation of a partnership at will which any partner (and not merely the new entrant) can dissolve at a moment’s notice.

In the case of an LLP, while its continued existence will not be threatened, the partners may find that their relationship is governed by the default regime under the LLP Regulations 2001. Under that regime, any partner can retire on reasonable notice and be free of restrictive covenants but (as in the case of a partnership governed by the 1890 Act) cannot be expelled, however badly he behaves.

The straightforward, if not risk free, option of dissolving the partnership and reforming without the miscreant partner will not, of course, be available in the case of an LLP.

 

Common mistakes

All too often, cases are encountered where the whole admission process has been approached with a degree of informality which is scarcely credible.

On being asked whether a deed of admission was signed, a frequent response is “we did not actually get around to it”. Then begins the quest for evidence that the newly-admitted partner became bound by the existing agreement in some other way.

In smaller firms, it is by no means unusual to find that no letter of offer referring to the agreement was handed to the new partner. He may not even have been provided with a copy of the existing agreement or, worse still, he may have been told that he need not worry about that agreement, as a new agreement is being drafted and will be put in place shortly. In the latter case, the inference that there is a partnership at will or an LLP on the default regime will be almost irresistible.

For the existing partners to argue that the agreement continues to apply between themselves but not to the incoming partner is unlikely to be sustainable. To have two sets of inconsistent terms applicable within the same firm would lead to chaos (such as terms on the expulsion of a partner which are valid for some partners but not others).

 

Subsequent conduct

Of course, it may be that the new partner can be shown to have become bound by the agreement by conduct following his admission, a possibility expressly contemplated by section 19 of the 1890 Act but, unaccountably, not in terms by the LLP Act 2000.

To demonstrate this it will, however, be necessary to produce evidence that the whole agreement has been adopted, not merely certain of its provisions, such as those relating to profit sharing and holiday entitlements.

Bear in mind also that an agreement the terms of which have been adopted by conduct will be just that. It will have ceased to be a written agreement to which all partners are signatories and, by definition, cannot bind all of the partners as a deed. From this it may follow that any powers of attorney granted by the original agreement may no longer be exercisable.

 

Other problems

But the application of the partnership/LLP agreement is not the only issue. It is common for such agreements, once in place, to be varied by conduct or by the exercise of an express power. Variations of the former type will, by definition, be unrecorded, while a record of the latter may take the form of a resolution, a memorandum or a formal deed of variation.

Regrettably, incoming partners are often not informed of such variations and are merely asked to sign up to the agreement in its original form. In such circumstances, the variations may be lost until such time as they can be re-established by conduct.

Any assumption that an incoming partner is agreeable to be bound by terms which have not been disclosed to him is a dangerous one.

 

The solution

The solution is simple. Ensure that a prospective partner is provided with a full pack containing the partnership/LLP agreement and details of all subsequent variations and that, in some way, he clearly indicates his willingness to be bound by them.

A well-drawn agreement that no longer applies is just so many sheets of paper.

 

rciab@partnershipcounsel.co.uk