This note looks at the perils of not having an effective and current Partnership Deed.
Partnerships can of course exist without a Deed and they are regulated by the default provisions in the Partnership Act 1890. Such partnerships are partnerships at will, which whilst governed by statute, will render the partners vulnerable as the default provisions can have unintended results. Some are noted later. Having a Deed prepared by an appropriately experienced solicitor will override the default statutory provisions that would otherwise govern the partnership and provide much needed security. A well drafted Partnership Deed will contain the basic necessary information to ensure the partnership operates smoothly.
Such information includes, but is not limited to:
Who the partners are
The commencement date of the partnership
The nature of the partnership’s business and its name
The sharing of profits and losses
The investments to be made as the capital of the partnership
The management of the partnership including arrangements for voting, absences, locum cover etc
The partners’ obligations to the firm
The resolution of partnership disputes
What happens upon dissolution of the partnership or upon the admission, death or retirement of any partner
Covenants from partners, including post-dissolution covenants
While this appears somewhat obvious, the absence of a properly drafted Partnership Deed may lead to problems emerging in the course of time. Practices are urged to adopt a preventative approach by formalising their Partnership, rather than suffer when problems do arise. Partnership disputes are inherently disruptive and very costly both in terms of stress and money. Disputes arising out of a partnership at will cost, on average, 15 times that of disputes arising out of a formalised Deed. Formalised Partnership Deeds do not prevent disputes, but do provide a method by which to approach such disputes with hope of a resolution.
Given the dangers of not having a formalised Partnership Deed, it is somewhat shocking that it is thought that a large number of UK healthcare practices do not have a current and effective Partnership Deed in place. It is crucial that the Partnership Deed is up-to-date and effective, not merely in existence.
A partnership at will can be brought to an end at any time by one of the partners giving notice to the other(s), for example 'I have lost the will to be in partnership with you'. Not only is this the most unstable relationship, there are a number of default provisions that will almost certainly not reflect the intended arrangements.
For example, under the Partnership Act the partners are to share both the profits and the debts of the practice equally. Often this equal division does not reflect the individual contributions made. A Partnership Deed, by contrast, allows for individual interests and profit shares to be clearly stated.
When a partner decides to leave a partnership at will, the partnership dissolves automatically. This also happens when a partner is asked to leave or when a new partner joins. Such dissolution may cause a forced sale of the partnership assets, potentially including the practice premises. The practice staff will be made redundant. Contractual arrangements will automatically terminate. The potential problems are multitudinous. In stark contrast, under a formalised Partnership Deed, dissolution should not occur unless all of the partners agree or such dissolution is ordered by the court or an arbitrator.
We would be very happy to advise your practice and to provide you with a tailored Partnership Deed.