Dissolution of a Partnership – Wielding Solomon’s Sword
When thinking about how assets of a partnership should be divided it is helpful to think of the story of the Judgment of Solomon, where King Solomon had to rule between two women who both claimed a child was theirs. Solomon’s judgment was that the child be cut in half and each would be given their ‘share’. Court orders on the dissolution of partnerships can be equally brutal.
Like Solomon’s sword, when a partnership is dissolved each partner will be entitled to their share of the partnership assets. In the absence of any agreement the Partnership Act 1890 will apply and the assets of the partnership will be shared in the same proportion that the profits of the business were divided. This can be easy for assets that are easily divided (e.g. cash), but can cause problems where the value of the whole is more than the sum of its parts. This is often the key issue in dividing partnership assets and is most likely to cause problems where two or more of the partners intend to continue trading separately after the partnership is dissolved.
The value of any investment property can easily be accounted for. An up-to-date valuation can be obtained and the value apportioned equally between the partners. The situation can be different, however, where the partners trade from a business premises. If one or more of the partners intend to continue trading from this premises after the partnership dissolves the value of the property could be significantly more to them than any third party. For example, a scrap yard could be valuable to the partners because the business has been established for some time and there is some goodwill attached to the location. For the partners the materials that are on the land could be a valuable asset, but a considerable liability to a new purchaser who would need to pay for the scrap to be disposed of.
Similar issues also occur with intangible property such as a trading name, client databases or marketing lists. A client list may be divided, but the partners would need to agree how this is done. A simple 50/50 split of the names may not equally divide its value, especially where the partnership has one or two key clients that generate most of the revenue.
Further issues can also arise in relation to employees. For example, the firm may have a key salesman and finance director. They are equally important to the business but both are needed to make the business a success. This also assumes that the staff would be happy to work with either of the competing partners, but often they quickly form alliances and have a clear preference as to who they wish to work with.
In the story of Solomon the life of the child was saved when one of the women relinquished her share, indicating to King Solomon that she was the true mother of the child. This enabled Solomon to do justice. On a partnership dissolution such a neat solution may be harder to reach. In the absence of agreement between the former partners then there is the risk of Solomon’s sword being wielded to the detriment of all partners.