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When an individual partner leaves or retires, those who remain will often want to continue trading. They will want that continued trading to be seamless, allowing for a use of partnership assets with no disruption of the relationship of the remaining partners. This can really only be achieved if the partners have entered in to a well-drawn partnership agreement.
If a partnership does not have the benefit of a partnership agreement, the partnership is likely to be a partnership at will. If a partner retires, in the absence of any agreement, the partnership will come to an end and must be wound up. What happens in practice is that the remaining partners continue with the practice, whilst at the same time trying to finalise partnership accounts up to the date of retirement, with a view to agreeing what sum the outgoing partner should be paid.
Section 42 of the Partnership Act 1890 may well apply in such a situation. Section 42 provides that where a partner ceases to be a partner, and the remaining partners carry on the business with its capital or assets without any final settlement of accounts as between them and the outgoing partner, then the outgoing partner is entitled, at his option, to such share of the profits made since his retirement as might be attributable to his share of the partnership assets or to interest at 5% per annum on the amount of his share of the partnership assets. If this provision is applied, it could have devastating effects on the remaining partners particularly when final accounts have taken months and in some cases years to agree.
A well-drawn partnership agreement can make clear provision for what is to happen on a partner’s retirement. It can address issues which might arise in valuing an outgoing partner’s share and set down a clear mechanism for valuing a share and allowing payments by instalments if required.
The death or bankruptcy of a partner will, unless an agreement provides otherwise, cause a dissolution and winding up of the partnership. Partnership assets can then be claimed to pay off personal debts in a share, equal to the number of partners. This has the potential to cripple a practice, and any who have invested more than their fair share may find themselves losing part of that investment to pay another’s debts. Again, a properly drafted partnership agreement can ring fence individual contributions and make full provision for what is to happen on the death or bankruptcy of an individual partner.