Getting out of a partnership - the importance of the partnership agreement

A recent Supreme Court decision (Cole v Lee [2017] NSWSC 1011) has highlighted the importance of having a Partnership Agreement and following the provisions of said Agreement when looking to terminate or retire from the partnership.

Background to the matter

The plaintiff (Ms Cole) operated a pharmacy in Randwick as a sole trader.  In February 2000, the plaintiff sold a one-third interest to the first defendant (Mr Lee) and a one-third interest to the second defendant (Mr Samimi).  The partnership was the subject of a Partnership Deed executed by the parties.  The arrangement between the parties was for the management of the pharmacy to be carried out by the defendants with the plaintiff working initially in the dispensing area on weekends.

By agreement between the parties, the Randwick pharmacy was sold and three pharmacies were acquired at the Macquarie Shopping Centre and operated under the partnership.  The plaintiff had a significant amount of money tied up in the partnership in the form of loans and had also granted security over her property for partnership liabilities.  For about two years the parties were in negotiations concerning the sale or incorporation of the partnership businesses and the winding up of the partnership, however, these negotiations did not result in an agreement.

The Partnership Deed provided for a “pre-emption” procedure where a partner can offer to sell their interest in the partnership to the other partners, for an agreed price or by valuation, and if the offer is not accepted the partner can then sell their share to a third party.

The Plaintiff wanted to remove herself from the partnership, but without invoking the “pre-emption” procedure.  In this regard, the plaintiff served a “notice of determination” on the defendants in October 2016 attempting to terminate the partnership pursuant to the Partnership Act 1892 (NSW) (“the Act”).  The defendants did not accept the “notice of determination” as valid.

It is not clear from the judgment why the plaintiff did not want to follow the pre-emption procedure, and preferred to terminate the partnership.

The Proceedings

The plaintiff commenced proceedings in the Supreme Court of NSW in December 2016 seeking a declaration that the partnership was validly terminated by the plaintiff’s service of the “notice of determination” and further orders for the dissolution of the partnership.  The plaintiff also sought alternative orders that the partnership be wound up by the Court on just and equitable grounds.

The first issue to be considered by the Court was the validity of the “notice of determination” issued by the plaintiff.  The plaintiff sought to terminate the partnership pursuant to section 26 of the Act which provides:

RETIREMENT FROM PARTNERSHIP AT WILL

(1) Where no fixed term has been agreed upon for the duration of the partnership, any partner may determine the partnership at any time on giving notice of the partner's intention so to do to all the other partners.

(2) Where the partnership has originally been constituted by deed, a notice signed by the partner giving it, shall be sufficient for this purpose.

At the hearing the plaintiff also sought to rely on section 32 of the Act which provides that:

DISSOLUTION BY EXPIRATION OR OTHERWISE

Subject to any agreement between the partners, a partnership is dissolved:

(a) If entered into for a fixed term, by the expiration of that term:

(b) If entered into for a single adventure or undertaking, by the termination of that adventure or undertaking:

(c) If entered into for an undefined time, by any partner giving notice to the other or others of the partner's intention to dissolve the partnership.

The defendants contended that the notice was ineffective.  The defendants did not oppose the plaintiff withdrawing from the partnership but put forward that she should do so by following the “pre-emption” procedure contained in the Partnership Deed.

The Court first addressed section 32 of the Act where the plaintiff intended to rely upon sub-paragraph (c).  The Partnership Deed made it clear that there was no specific period of time over which the partnership was to continue.  However, at the same time, the terms of the Partnership Deed make it clear that the partnership was to continue for the duration of the business. The Court found that even though the business was conducted at multiple locations and having moved from the original location, it still remained a single adventure or undertaking.  The Court found that sub-paragraph (b) of section 32 of the Act applies meaning that sub paragraph (c) of section 32 of the Act cannot apply.  Parker J then went further to state:

“If I am wrong about this, I think that the Partnership Deed excludes termination by notice under s32(c).  Clause 3.1 provides for the parties to carry on the business until the partnership is determined as provided by this deed.  The partnership can only be determined in defined circumstances, and the deed confers no right on the partners to terminate it unilaterally.  The only unilateral step a partner can take which may result in termination is to invoke the “pre-emption” procedure.”

The Court then addressed section 26 of the Act and found that is did not apply in the present case because the partnership was not one for “no fixed term.”  Further, Parker J states “in my opinion, the analysis of the statutory language, its antecedents, and the court of authority show that the circumstances in which s26 can be invoked are limited" and that “s26 does not assist the plaintiff in this case.”

The Decision

The Court found that the plaintiff’s “notice of determination” was ineffective to result in the termination of the partnership.  The plaintiff’s claim, based on the notice of determination, was dismissed.  The Court did not deal with the application on the just and equitable ground noting that the plaintiff was free to proceed with such an application but that she will have to overcome the argument that before it can be just and equitable to wind the partnership up, the pre-emption procedure contained in the Partnership Deed should at least be tried.