They say that ending a business arrangement can be more difficult than ending a marriage - especially if a partnership or shareholders’ agreement is involved.

So what’s the best way to get rid of troublesome business partners? The short answer is - it depends!

When you are “considering your options” you need legal advice which is tailored to your specific situation. Because there are a number of different commonly used business structures, your rights and the best options available to you will depend on the type of structure used in your business. Often, a combination of structures is used in larger or more complex businesses, which complicates termination of the arrangement. This article gives general guidance about what we will consider so that we can give you the specific advice you need to end any business arrangement you are currently in - on the most favourable terms to you.

General partnership

This may be a combination of individuals or companies. It is important to remember that partners are liable for all debts of the partnership - including due to the activities of other partners.

The starting point is to review any written partnership agreement to see if it contains a dissolution procedure which must be followed. It is also necessary to consider the reason why the partnership was set up in the first place. In some situations, the reason why the partnership was established may have ended and this may enable you to terminate the partnership.

In NSW, partnerships are governed by the Partnership Act 1892 which provides that partnerships may be dissolved due to:

(a)       Bankruptcy or death of a partner.

(b)       Illegality of the partnership business (for example, due to a change in the law).

(c)       Court order (for example, due to a partner being of unsound mind or wilful or     

            persistent breach of a partnership agreement by a partner).

(d)       In certain cases, a notice from a partner to the others about their intention to 

            dissolve the partnership.

Different rules apply to the dissolution of limited partnerships due to the limited liability of limited partners.

Company

The main attraction of this business structure is of course the limited liability of shareholders. Shareholders and/ or directors may have guaranteed loans or other financial obligations of the company such as leases or credit arrangements with suppliers so this must be considered if you wish to change the status quo by exiting or causing/ allowing another party to exit.

The starting point is any shareholders’ agreement which often provides for:

1. How decisions are made.

2. How deadlock is to be resolved.

3. How shares are to be transferred (for example it may require shares be offered for sale other shareholders before external parties - “pre-emptive rights”).

4. A procedure by which a shareholder can “buy out” another shareholder’s shares.

5. How shares are to be valued.

In Australia, companies are incorporated pursuant to the Corporations Act 2001 (Corporations Act). Other options available under the Corporations Act include:

(a) Winding up the company (for example by the Court in insolvency or because it is “just and equitable” to do so). This may mean that the business of the company can be sold and the proceeds divided amongst the shareholders, once any debts are paid. This may be an expensive option, best avoided unless necessary, but sometimes the only available option.

(b) Voluntary deregistration of the company. This is only possible when:

1. All the members of the company agree to the deregistration.

2. The company is not carrying on business.

3. The company's assets are worth less than $1,000.

4. The company has paid all fees and penalties applicable.

5. The company has no outstanding liabilities.

6. The company is not a party to any legal proceedings.

(c) If your company is not currently eligible for voluntary deregistration, we may be able to formulate a plan with you and negotiate with other parties to enable any business to be transferred and debts paid so that the company can be voluntarily deregistered. This is a potentially low-cost option so always worth considering!

(d) There are other options. For example, if a company owes you a secured debt you may have the right to appoint a receiver. If the company is, or will become, unable to pay debts as and when they fall due, including any unsecured debts owed to you, the appointment of a voluntary administrator may be the best option.

Trusts

There are two types commonly used in business in Australia:

1. Discretionary trust - where the trustee has discretion in the distribution of income to beneficiaries.

2. Unit trust - where income is distributed according to the proportion of units held by beneficiaries.

For other types of trusts (for example testamentary trusts or superannuation trusts) the guidance below doesn’t apply and you should contact us for special consideration of your circumstances.

It is important to consider who is the trustee of the trust as different considerations apply where there is a company as trustee (called a “corporate trustee”) as opposed to an individual trustee.

The starting point is the trust deed. This provides for the operation of the trust and ordinarily contains:

(a)          Powers of the trustee.

(b)          Identity of beneficiaries or potential beneficiaries.

(c)          How income is to be distributed.

The Trustee Act 1925 also applies to trusts in NSW and must be considered.

A trust can be ended:

(a)          When it reached its “vesting date” which is set out in the trust deed.

(b)          By the agreement of all possible beneficiaries.

(c)          In certain cases, by Court order.

The Court also has power to regulate the activities of the trust and, if necessary, to remove a trustee, for example if the trustee is openly hostile to the beneficiaries or not operating the trust according to the trust deed.

Negotiation, strategy and outcome

The experienced lawyers at Longton Legal know what factors are relevant to your business, including those listed above. We will formulate a strategy for you based on your individual situation then work to get rid of your business partner as quickly as possible, including negotiations where relevant.

Don’t put up with an unsatisfactory business partner - contact us today!

*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*