The Partnership, the Silent Partner and the Departing Capital
Three accountants, Farah, Gus and Hana, practise in partnership under a written agreement. The agreement says profits are shared equally, that 'no partner may be expelled,' and that 'a partner may retire on six months' notice.' Hana lends the firm £50,000 personally and takes no security. Gus wants to leave immediately after a dispute and announces at a client meeting that he has resigned with effect from that day. A major client, hearing this, moves its work to a competitor. Farah and Hana want Gus out and want to recover the client loss. Gus claims his share of the firm's capital and says the partnership is at an end.
1. Advise on Gus's status and whether his announcement dissolved the partnership.
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Under partnership law, a partnership is dissolved by the expiry of a fixed term, by notice where the partnership is at will, by death or bankruptcy, or by court order. Where the partnership agreement specifies a retirement mechanism, a partner who wishes to retire must follow it. Here the agreement requires six months' notice. Gus's announcement of immediate resignation does not comply, so it is ineffective to retire him at that moment.
His statement at a client meeting is not a notice of dissolution to his partners, and even if it were, the agreement displaces the default rule that a partnership at will can be dissolved by immediate notice. The agreement also expressly forbids expulsion, so Farah and Hana cannot expel him without his consent or a court order. Gus therefore remains a partner unless and until he serves valid notice or the court dissolves the firm.
Gus's claim that the partnership is at an end is wrong. A dispute among partners is not a ground for automatic dissolution; at most it supports an application to the court for dissolution on just and equitable grounds, which is a discretionary remedy and rarely granted where a workable exit mechanism exists. The practical consequence is that Gus remains entitled to his share of profits and to be consulted, but he also remains bound by his duties, including the duty of good faith and the duty not to compete.
2. Assess Farah and Hana's claims against Gus for the lost client and Hana's position as lender.
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Farah and Hana's claim for the lost client rests on breach of the partnership agreement and breach of the duty of good faith. Announcing an immediate resignation at a client meeting, in circumstances where he had no right to resign, is conduct likely to undermine the firm's relationship with that client. The loss is the profit the firm would have made on the client's work, and it is recoverable if they can show the announcement caused the departure and quantify the lost margin. They must also show they mitigated the loss, for example by contacting the client to clarify the firm's position.
Gus's claim to his capital share must be assessed against the agreement. On a valid retirement he would be entitled to an account and to the amount due, but he has not validly retired. His capital remains in the firm, and he cannot demand repayment while he remains a partner unless the agreement permits it. If the firm later dissolves, he ranks as a partner for capital after outside creditors are paid.
Hana's £50,000 loan is a debt owed by the firm. As lender she is an outside creditor and ranks ahead of the partners' capital claims on dissolution. Because she took no security, she shares with other unsecured creditors, but she is not subordinated merely because she is a partner, provided the loan is genuinely a loan and not capital. She should ensure the loan is documented and recorded in the accounts to avoid a later argument that it was a capital contribution.