Dissolution of Partnership
Partnership Litigation & Disputes Article #1
This is first of a series of articles related to commercial litigation and disputes in the context of partnerships. In this article we focus on the scenario where one of the partners purports to dissolve the partnership and the other partner disputes the validity of the notice of dissolution.
A partnership may have two or more partners who together own and operate a business. The partners need not be individuals. For example, a number of companies could form a partnership together. However, a partnership is a separate and distinct legal structure to a company. In general terms:
- The rights and obligations of the partners in a partnership are principally governed by any partnership agreement into which they may enter and also by the Victorian Partnership Act 1958. The series of articles will consider these matters.
- The rights and obligations of the members or shareholders and of the directors of a company are principally governed by the company’s constitution, by any separate shareholder agreement into which they may enter and by the Commonwealth Corporations Act 2001. CBL is developing a separate series of articles in relation to Company Litigation & Disputes.
The Partnership Act provides to the effect that, unless there is an agreement between the partners to the contrary:
- A partnership which is entered into for a fixed term will be dissolved on the expiration of that term.
- A partnership which is entered into for the purposes of a single undertaking or purpose will be dissolved on the termination of that undertaking or purpose.
- A partnership which is entered into for an undefined period of time will be dissolved when one partner gives notice to the other partner(s) stating that partner’s intention to dissolve the partnership.
Business litigation and disputes can arise when one partner seeks to terminate a partnership. The most common form of partnership is one that is entered into for an undefined period of time. Based on the Partnership Act, such a partnership can usually be dissolved by simply giving a notice of dissolution. If the notice states a date in the future as the date for dissolution then the partnership will be dissolved as from that date. If the notice does not state any such date then the partnership will be dissolved immediately upon the giving of the notice.
It is therefore the case that many partnerships can be dissolved by one or another of the partners immediately and without any wrong doing on the part of the other partner. The CBL Business Contracts and Agreements team recommends that a formal partnership agreement always be put in place to ensure that the partners know and understand their rights and obligations.
If there is a partnership agreement then it may be the case, depending upon the specific agreement between the partners, that the partnership cannot simply be dissolved immediately upon the giving of a notice of dissolution. This is because the relevant provision of the Partnership Act only applies, “subject to any agreement between the partners…”. Of relevance is therefore whether or not there is a separate partnership agreement between the parties and, if so, whether that partnership agreement contains any terms and conditions relevant to how or when the partnership can be dissolved.
Even if a partnership agreement does not include provisions which specifically refer to dissolution of the partnership, there may be other provisions that have the effect that the Partnership Act dissolution provisions do not apply. For example, the agreement could: a) include retirement provisions where one partner may give notice of retirement to the other partner and, in turn, the remaining partner may be required to purchase the share of the departing partner; and, b) include the relatively common provisions to the effect that the partnership will continue unless terminated in accordance with the agreement. If such provisions are included it is likely that the relevant dissolution provision of the Partnership Act referred to above would not apply.
So what is the result if one partner purports to give a notice of dissolution under the Partnership Act contrary to the provisions of the partnership agreement? Although the outcome of each case will depend upon the specific facts and circumstances, the partner receiving the purported notice of dissolution would usually be able to treat the notice as being void and of no effect. Alternatively, that partner may decide to treat the giving of the notice as being what is called a repudiation of the partnership agreement on the part of the partner giving the notice.
The partner giving the notice is, however, not necessarily out of options. Even if that partner cannot dissolve the partnership under the Partnership Act or the partnership agreement, they may nonetheless commence commercial litigation and apply to the Supreme Court for a decree of dissolution of the partnership.
There are various grounds upon which the Supreme Court may make an order for the dissolution of a partnership. The broadest of these grounds is where the Supreme Court determines that circumstances have arisen which makes the Judge of the opinion that it would be “just and equitable” for the partnership to be dissolved.
The pages of this site relevant to this article can be found here:
Please note that the facts and circumstances relevant to every client are different. The above article should not be relied upon as legal advice. Article by Nicholas Corr published 7.7.13. To be notified of new articles: