Partner’s withdrawal not such a smart move!
If you don’t have enough money to fund your business yourself, there are various ways to obtain the necessary capital. One of these is to set up a limited partnership. This is a partnership with one or more general partners, who are actively involved in running the business, and one or more limited partners who merely contribute funds and are not permitted to have any further active involvement in the business.
The advantage to the limited partner is that he shares any profits but doesn’t have to contribute to any losses, as long as he has not been actively involved in the business.
Disappointing turnover figures meant that my client’s business had been making a loss for a number of years. As a result, no profits could be paid to my client’s limited partner. The limited partner received no return on his investment, which he had been counting on.
At a certain point, the limited partner gave notice that he was withdrawing from the partnership because he was not receiving any returns. He gave notice retrospectively, with effect from a date more than two years earlier. He also claimed back a significant proportion of the funds he had provided. My client came to me for legal advice.
My client and I determined that accepting the withdrawal would be of benefit to my client. In the first place, it would make him the sole owner of the business. In fact, the withdrawal converted the status of the business from a limited partnership to a sole trader.
In addition, the other party had no right to the amount he was claiming. His withdrawal meant that the partnership had to be wound up as at the effective date. As it was not possible to withdraw retrospectively, the settlement had to take effect at the time of notice of withdrawal being given. The losses that had been suffered meant that the business was worth substantially less and the partnership’s capital was zero (or close to it). On the basis of the accounts, therefore, the silent partner was not due any money.
I explained this to my client’s former silent partner in a number of letters. Although he maintained that I was wrong, he was unable to produce any arguments entitling him to receive money. Due to the costs involved, my client decided not to apply to the courts for confirmation that our arguments were correct. However, the silent partner did not have enough confidence in his own arguments to take his claim, which ran to many tens of thousands of euros, to the courts either.
My client’s objective was achieved by communicating clearly with the other party and taking no further action. Given his financial situation, my client was also very satisfied that I was successful in keeping his costs to a minimum.
He has shown his satisfaction in the best possible way – since that matter concluded he has called me several times to discuss a new issue.