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Quasi Partnerships – recent developments

A couple of recently-decided cases have clarified certain points on quasi-partnerships.

Lawyers are encouraged not to use Latin words and phrases any longer, so this is one of the few that survive in regular use with the blessing of the courts: a “quasi-partnership” is an incorporated business which is has at least some of the characteristics of a partnership, particularly those of confidence and trust between the participators. The Partnership Act 1890 speaks of “mutual rights and duties” (section 19), the right to “take part in the management of the partnership business (section 24(5)) and obligations of financial accountability (sections 28-29). These characteristics are enforced under section 994 of the Companies Act 2006 in companies where the relationships between the parties are, or formerly were, marked by their coming together in business on the basis of mutual trust and confidence. 

However, the category is “fluid”: a business previously conducted as a partnership but which is subsequently incorporated is likely to be a quasi-partnership following its incorporation; but it may later cease to be so. Likewise, a business which is incorporated as a company can also subsequently metamorphose into a quasi-partnership. It is the nature of the relationships at the relevant time which is key to determining whether one exists or not.

Such businesses are treated by the courts “as if” they were to some extent still partnerships with additional enforceable rights for each participator provided it can be demonstrated that rights have been unfair prejudice. The remedy is given by the Companies Act 2006 section 994 under which an aggrieved shareholder can complain to the court that his rights are being unfairly prejudiced.

In the case of Wootliff v Rushton Turner [2016] the service agreement of a director-shareholder was terminated. The view had previously been that the rights affected had to be only those which were enjoyed in the capacity of a member. This meant that, for example, rights under an employment contract would not be relevant.

But the court held that a shareholder can validly bring a claim for unfair prejudice where his employment rights have been affected and where the employment aspects formed an essential part of the overall arrangements entered into between the shareholders for the business.

However, in that particular case, the court decided that (i) the relationships were not sufficiently close as to make it a quasi-partnership; (ii) the arrangements had been negotiated on a commercial basis between the parties and reflected in professionally drafted documentation; and (iii) the venture had involved 3rd party investment, indicating a commercial venture, rather than one between business “partners”.

The case shows that the courts will look at the overall relationships of the parties, rather than making a narrow distinction between strictly shareholder rights, such as the right not to be diluted, and other non-shareholder rights in the business. The decision does seem to illustrate a common sense approach and, with the benefit of hindsight, it now seems strange that the remedy was previously restricted to enforcing only rights enjoyed as a shareholder, particularly when the courts have taken the behaviour of the parties into account in such cases, whether or not such behaviour was aimed solely at another party’s shareholder rights.

The case of VB Football Assets v Blackpool Football Club (Properties) Limited & Others [2017] saw the courts continue to insist that they will take into account non-contractual arrangements which have been entered into by the parties. This is not new: another case back in 2001 had established that the courts would enforce arrangements even if they may not be legally binding, provided they had been relied on by the parties. The case also confirmed that, since the court has a discretion under section 996 as to what order it may make, it will not be precluded from providing a different solution from that sought by the aggrieved shareholder but will use its discretion to provide a solution. In that case, it ordered a buyout of the minority shareholder’s shares in order to provide a clean break.

The two cases continue to demonstrate the robust attitude that the courts will take in deciding where they will intervene and the discretion they will exercise to provide a remedy that fits the facts of the particular case.

This is an area of law which is likely to continue to develop because of the particular circumstances of each case which reveals the desire of judges to nuance their flexibility in providing remedies.