Expelling an individual from an LLP or partnership – risks and considerations

Exits for limited liability partnership (“LLP”) members and partnership partners should always be handled with care, not only to minimise the risk of disputes arising, but also to avoid damaging relationships with clients and the remaining members or partners and employees of the firm.

In this article, we will outline the steps for expelling an individual from either an LLP or a partnership and consider the most common issues that may arise with member or partner departures, as well as offering practical suggestions on how to avoid or overcome these potential pitfalls.

What is expulsion?

The power of expulsion entitles a firm to bring the relationship with a partner or member to an end on the basis of one or more specified grounds. The cessation of membership can take effect immediately or at any other stipulated period set out in the agreement.

Legal right to expel

There are minimal distinctions in how individual exits are navigated within partnerships compared to LLPs. The starting point when considering a member’s departure within an LLP is often by looking at the written agreement (Eaton v Caulfield [2011] EWHC 173 (Ch)). Likewise, for partnerships you would need to look at the agreement in place prior to expelling a partner. This is because pursuant to the Partnership Act 1890 and The Limited Liability Partnership Act 2000, which govern partnerships and LLPs respectively, there is no general right to expulsion afforded. Instead, the onus is on LLPs and partnerships to ensure that they have express provisions under their agreement that facilitate for this. This emphasises the importance of ensuring that you have an agreement in place that governs your partnership or LLP and contains specific provisions dealing with expulsion.

In absence of any such clauses in your agreement, the only other two options the LLP or partnership will have to get rid of a member or partner will be:

1. To reach an agreement with the partner or member in question as to how they will leave the firm – usually on terms that they are paid an agreed sum
2. To apply to dissolve or wind up the partnership or LLP which the court may or may not grant.

What should an expulsion clause include?

Grounds for expulsion

The grounds for expulsion must be clearly set out in the partnership or LLP agreement. Examples of such grounds include:

• Material or serious breach of the partnership or LLP agreement
• Persistent or repeated breach of the partnership or LLP agreement
• Non-performance and failure to fulfil obligations
• Conduct that may bring the firm into disrepute
• Insolvency
• Losing regulatory approval
• Incapacity
• Gross misconduct.

Where possible, the best approach is to have objective specific grounds for expulsion, rather than subjective discretionary grounds.

Procedure for expulsion

There is no set way of exercising a power to expel, although the clause within the agreement giving such power may lay out relevant processes to be followed, prior to expelling a partner or member, for instance:

• The number of votes required to pass the resolution and quorum requirement
• Whether notice should be given to the member or partner
• Consideration of whether the member or partner should be permitted to attend the meeting
• Whether there should there be a right for the member or partner in question to be heard
• Providing reasons to the member or partner for the decision reached
• The right of appeal and consideration of the process of such appeal.

Where such procedures are explicitly set out under the Partnership or LLP agreement, it is imperative that the process and requirements under it are followed strictly, ahead of any decision to expel being made.

Issues to consider when expelling an individual from an LLP or partnership

• Make sure you review the terms of any written agreement to ensure that clauses dealing with expulsion are drafted clearly, cover issues that may arise and allow the process to be dealt with efficiently. Expelling an individual can often arise due to fault or commercial pressures, so being able to identify a clear procedure and sticking to this can help your firm navigate through what will inevitably be a tricky juncture
• A firm’s decision to expel an individual is often challenged by the departing partner or member, so it is important to establish reasonable and objective reasons for expelling before exercising the power to do so
• Ensure that you keep accurate records of how the decision to expel came to be made. The need for a paper trail comes into focus if that decision is subsequently challenged by the departing individual. Ensure that any expulsion documentation is thoroughly drafted and avoid sending unguarded communications to other partners or members discussing the expulsion, which could be disclosed in subsequent court proceedings
• If a partner or member has behaved in a manner punishable by expulsion, consider suspending, subject to the provisions of the agreement, that individual – potentially with pay – while you investigate the circumstances in order to avoid making any snap judgments to expel them
• Partnership or LLP agreements can often make provision for compulsory retirement of partners or members. This is not entirely the same as expulsion as an individual can be made to retire without any need for fault being identified and there is almost always a notice period before the retirement takes effect. Consider whether you should make provision for compulsory retirement of individuals in your firm, and if so, what needs to happen to effect it, i.e., notice period, voting majority require, procedure or garden leave provisions.