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Exclusion of a Partner from a Partnership - Legal & Factual Issues


Legal Insight

November 2019

Dimitris Veziridis, LL.M.

Summary: Quite often there are cases of partnerships, which while they start their operation with the best of conditions, however, there comes a time when the "symbiosis" between the partners becomes particularly burdensome and no longer tolerable, either because of intense disagreements between them regarding the operation and strategic course of the company, or because one of them chooses for personal reasons to stop cooperating with the others in the same corporate spirit with which they started. For these cases, the law, has established the remedy of "partner disqualification", the conditions of which will be examined in this article.

1. Introduction

In a previous article, we dealt with the question of whether it is legally feasible to request the Court to exclude one of the two partners when it is the frequent case in practice that the general partnership is composed of only two members. There we had aptly addressed this concern by giving a positive answer, while at the same time exposing the ambivalence which then characterised the case law of our Courts on this issue. Recently, the Supreme Court, in two consecutive decisions, resolved the disagreement between theory and jurisprudence, holding that it is permissible to request the exclusion of one partner by his partner, on the condition that the latter will find a replacement within 4 months, otherwise the partnership will be led to dissolution. The crucial question remains, however, under what conditions the exclusion of a partner can be achieved and what circumstances must be present in order for it to be accepted by the court seized of the case. We will try to deal with this question in this article.

2. The conditions 

As is well known, commercial partnerships are associations dominated by the personality of the partners. This follows from the fact that the pursuit of the corporate purpose is based primarily on the personal contribution of each partner and the cooperation between them. In such partnerships, the achievement of the corporate purpose, for the sake of which the general partners place their personal services and their property at risk, is possible only if there is harmonious cooperation between them, the precondition for which is the existence of absolute trust between them. This trust is the building block on which every commercial partnership is founded.

Accordingly, it is essential that, with a view to the establishment of the company, the future partners should be selected with great care, so as to ensure the participation in the company of persons who are reliable and capable of contributing to the achievement of the planned activity.

Unfortunately, however, experience teaches us that this element, which is so important for the success of a company's business, is sometimes neglected, while the strict criteria initially required for selection are usually diluted in view of financial needs, which require the preference to be given to people who are able to provide the financial conditions for the start or continuation of the business, while they are probably the most unsuitable or unable to cope successfully with the company's tasks. 

According to the law, two conditions are necessary for the exclusion of a partner: (a) the existence of a legally existing partnership and (b) the existence of 'good cause' attributable to the person of the excluded partner.

The first condition is sufficiently well understood. The second condition, however, requires further explanation. When the law uses the vague legal concept of 'good cause', i.e. when it does not explain/define what it considers to be a 'good cause' which may lead a partner out of the partnership, it is intended to grant the Judge the power to determine the content of this concept. It is thus left to the judge to assess all the particular circumstances of the case, which cannot be known in advance to the legislature. Thus, at least at first level, a 'good reason' for exclusion is any event which, either directly or indirectly, relates to the person of a partner and consists of an act or omission, whether culpable or not, which, in accordance with the principles of good faith, morality and an overall assessment of all the specific circumstances, renders the continuation of the partnership with that partner intolerable or intolerable for the other partners.

In fact, the continuation of the partnership is considered to be intolerable when it causes particular difficulties or weakness in the cooperation of the partners, with the result that the continued presence of that partner in the partnership jeopardises its smooth operation or even its very existence.

Cases which - to date - have been held by our case law to constitute such a "good cause" that justifies the exclusion of the partner who caused them, are the following: engaging in a competitive activity, continuous and methodical absence or absenteeism from any meetings with the purpose of making it impossible to take a decision, causing unnecessary disagreements about the management and strategy of the company, interrupting or disturbing any personal relationships, shaking of trust due to indifference or mismanagement of company affairs, systematically defending individual interests against the company's interests, intransigence in cooperation in the daily operation of the company, verbal incidents and quarrels of their own corporate purpose. 

The above, according to the case law, should always be in connection with obvious economic reasons, which have as a consequence, either the paralysis of the operation, or the inability to fulfill the purpose of the company and of course they are circumstances that are characterized by the element of permanence, so that it can be concluded that the "no further tolerance" of the continuation of the company with the partner who causes the problems in question.
More specifically, the decision of the Athens Court of First Instance, No. 3019/2017, ruled that there is good cause for the exclusion of one of the general partners of the case in question, because he was working in parallel in another company, a fact which he concealed from the other partners, while he was employed for only a few hours to achieve the company's purpose. When a company car was subsequently provided to him at his request, he used it as his personal vehicle, in addition to his working hours and despite the agreement to the contrary as to its use. There began to be constant disputes as to how each partner should contribute to the achievement of the company's purpose, disagreements as to the strategic planning of the company and especially on the issue of the manufacture and import of food supplement preparations, which was the object of the company in question. Subsequently, the excluded partner began to challenge the managing partner's right to manage the company, while presenting himself to customers as the founder and manager of the company. These constant disagreements led to a serious disturbance in the relations between the partners, which had an impact on the general organisation of the firm and had serious repercussions on its smooth operation, repercussions which became permanent, as a result of a lack of mutual trust in the relations between the parties and the consequent inability to continue to cooperate in order to achieve the purpose of the firm.

Similarly, the decision of the Thessaloniki Court of Appeal No. 28/2017 held that there was indeed good cause for the exclusion of one of the partners, because while financial problems began to emerge in the company, he caused strong disagreements as to how to deal with them, while at the same time he refused to provide personal work and came to the company's shop after 12:00, while the other partners worked from 07:30. When the company was unable to meet its obligations, the other partners proposed to cover them with their own funds. Then, in order to agree, the excluded partner asked the other partners to pay him the amount of EUR 6,000.00 in order to cover his individual income tax liabilities to the IRS. Following these incidents, the tension in the relations between the parties became more intense, and the mutual obligation of the partners to contribute to the pursuit of the partnership's objectives was replaced by statements made out of court, complaints to the police station in their respective areas and the exchange of documents. Thus, the Court decided that circumstances existed in the present case which, in accordance with the principles of good faith and commercial morality, made the continuation and even more so the proper functioning of the partnership burdensome for the other partners and ordered the exclusion of the partner who had displayed the conduct described above.

3. The circumstances

The assessment of the existence of good cause, in view of the above-mentioned diversity of the cases in which a partner's exclusion may be applied, requires as a prerequisite that all the specific circumstances and circumstances which militate in favour of or against the exclusion be taken into account, in order to determine to what extent a circumstance or form of conduct is capable in the case in question of constituting good cause and also whether the exclusion is justified in the individual case under consideration. 

Thus, in addition to the conduct cited above, the Court's assessment will be influenced by any significant services which the excluded partner provided during his participation in the firm. Account will also be taken of the nature and gravity of the conduct, the risk of its repetition, its consequences for the firm and the other partners and the interest of the firm in restoring its proper functioning in conjunction with the interest of the disqualified partner in maintaining his status as a partner.

Furthermore, it will be taken into account whether there is complicity of the other partners in the creation of the good cause in question, any misconduct capable of justifying the exclusion of the partner or partners seeking the exclusion of their partner, or any other misconduct capable of removing the good cause from the partner's misconduct. 

Therefore, in addition to the general conduct of the partner to be disqualified, an assessment of the prior conduct of the other partners will also be made, which is not without significance, since it may form the basis for a negative prognosis as to the development of the partnership. Thus, the acts and omissions of the other partners should also be taken into account, both in relation to the firm and to the partner to be excluded, in order to establish whether and to what extent the other partners, by their conduct, have induced the partner in question to commit the act which constitutes an important reason for his exclusion.

Furthermore, the general attitude and tolerance of the firm in question in dealing with similar cases will also be a factor in determining whether there is a good reason for exclusion. In this context, it should be taken into account whether the general tolerance of the company in the past has justifiably created in the excluded partner the certainty that the commission or omission of an act does not affect the interests of the company and indeed to such an extent that it constitutes a good reason for his exclusion. Thus, if in the past the firm and the other partners have dealt with similar situations by opting for milder measures, such as written or oral warnings and recommendations, in accordance with the principle of equality of partners and proportional treatment of similar cases, a similar measure should be applied in the present case and not exclusion.

In view of the above considerations, the assessment of each specific factor relating to the individual case at issue is decisive in forming a safe and fair judgment as to whether the facts relied on may in fact constitute a valid ground for the exclusion of one of the partners. 

4. Epilogue

Given the complexity that characterizes today's corporate life and reality, it is certain that every partnership faces more or less difficulties in the cooperation between them. In the event that these difficulties arise within the partnership regarding business decisions or the strategy that the partnership should pursue in the future, they cannot be resolved by the partners themselves, either because one of them usually disagrees unreasonably, or because he believes that his own opinion should be followed - without regard to the opinion of the others - the other partners should directly contact their legal representative to advise them on how to proceed and what they should do to remove from the partnership the partner who is disturbing the smooth cooperation between the others.

(on the right of exit in a general partnership see here)
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