Dissolving a business partnership in the absence of a partnership agreement
May 06, 2019The Supreme Court made orders in 2017 regarding the winding up of a partnership that operated a real estate agency. The two former partners agreed upon the existence and duration of their partnership, and upon a need for partnership accounts to be taken under the supervision of the Court, but they disagreed as to the character of the business of the partnership and the ownership of property used by the partnership in the course of its business.
There was no written partnership agreement, rather the partnership was formed entirely orally “confirmed in large measure by a course of dealing characterised by a consistent division of profits during the currency of the partnership” but “arguably silent about the division of property upon dissolution of the partnership.”
The issue for determination by the Supreme Court in the 2018 proceedings was whether at the time of dissolution of the partnership the rent roll of the business operated from premises in Kirribilli under the trading name “Deborah Richardson Real Estate” was beneficially owned by the plaintiff and:
- the first defendant; or
- the second defendant (the corporate vehicle of the first defendant).
The second defendant held the appropriate real estate licence.
There was no dispute regarding the respective shares of the partnership property and income (being an agreed 60/40 split), but the dispute was regarding the ownership of the rent roll – that is, whether it was subject to the same split, or owned outright by the first defendant, noting that the plaintiff was a “silent partner” in the business.
The Court held that by selling the rent roll without the fully informed consent of the plaintiff, the first defendant was acting in breach of fiduciary obligations she continued to owe to the plaintiff as her former partner, pending winding-up of the partnership. Accordingly, a constructive trust was created in favour of the plaintiff.
In taking a partnership account, the Court sought to identify and distinguish between:
- Partnership property and separate property;
- Partnership debts and separate debts
- Those profits and losses which are to be credited or debited to all the partners, and those to one or more of them to the exclusion of the others.
The Court then proceeded to analyse the financial statements of the business, consider the various surcharges claimed by the various parties, and determine what amounts were owed to whom in the final accounting of the partnership financial assets.
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Just as with any business, business owners (whether partners, directors or shareholders) should keep accurate accounts of the business, and in particular, identify the source of funds contributed to the operation of the business, so that in the event that the business is wound up, the business funds can be distributed in a just and proper manner.
Contact the Shire Legal team if you have any questions.
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