Expelling a partner can be difficult for other partners to navigate. We have put together our thoughts on what to consider when drafting a partnership agreement.
Power to expel
The Partnership Act 1980 does not provide for expulsion of a partner therefore, the power to expel a partner and the grounds for expulsion must be clearly set out in the partnership agreement. – If this is not the case, the partnership will either have to come to an agreement with regard to their exit or apply to the court for dissolution of the partnership. This is an extreme remedy which may or may not be granted.
The grounds for expulsion, such as a breach of the partnership agreement, insolvency or failure to pay monies within a certain period of time, should be set out as clearly and objectively as possible to avoid any question of discretion being exercised improperly.
The procedure to follow in exercising the power of expulsion must likewise be set out clearly in the partnership agreement. Consideration should be given to the following:
- Who can vote on the proposed expulsion?
- How many votes are required to pass any proposal to expel a partner?
- Does the partner in question have the right to be notified of the proposal, to attend any meeting at which the proposal is put to members, to speak at any meeting and to be represented at any meeting?
- Is the partner subject to the resolution to expel entitled to notice of the reasons for expulsion?
- Is there any right to appeal?
Other provisions to consider in the context of expulsion include:
- Suspension of a partner while any potential complaints are investigated
- Garden leave to exclude a partner from the place of work and restrict access to key files and clients while any complaints are investigated or the expelled partner is serving any notice
- Payments to outgoing partners and whether expelled partners should be subject to bad leaver provisions resulting in their entitlement to payment and other rights on leaving being restricted
- Post-termination restrictions to prevent the outgoing partner from damaging the firm’s goodwill after the partner has left the partnership
- A dispute resolution clause – if such a clause is included in the partnership agreement, is it intended to – and does it catch disputes relating to an expulsion?
Compulsory retirement clauses
It is not unusual to see a provision for compulsory retirement, under which a partner will be required to retire after a set period of notice. Although similar in nature to expulsion, compulsory retirement is not entirely the same. Unlike an expulsion clause, a compulsory retirement provision does not need to rely upon a fault or breach by the outgoing partner.
As above, a compulsory retirement clause should be clearly drafted and should include the following:
- The notice period after which the outgoing partner will retire
- The procedure for making the decision to have a partner retire. Consideration should be given to the number of votes required to pass a resolution, whether the outgoing partner should be given notice of the meeting and whether the partner in question has the right to attend or be heard at the meeting
- The number of partners who can be compulsorily retired at any one time. This will prevent a large majority of the partners leaving the partnership in one go.
Expelling a partner can be a tense time for a partnership and has the potential to become contentious. A partnership agreement that considers the above factors will help you manage an expulsion as efficiently and amicably as possible.