Statistics show that up to 70% of business partnerships ultimately fail.
Many joint ventures, partnerships and companies start out with the best of intentions between friends or colleagues, unified by a common goal of making profit. Inspired by optimistic outlook, the necessity of formal agreements are often overlooked. However, when disputes between partners get out of control, it can turn a profitable business into losses – not just monetary loss, but also loss of reputation.
What are the reasons for failing?
Firstly, doing business with friends or family is risky. Friends or family members often fail to maintain a separation between business and personal relationships.
Other common reason for failure include:
- Unequal contributions by the partners. Nobody likes lazy partners!
- Personality clashes
- Loss of trust in each other
- Differing values and visions.
A simple handshake to start a business is simply not good enough. The sad thing is that when business fails, the relationships between friends or family will also turn sour.
Incorporated Business – Potential Problems
Where business partnership is undertaken via a company structure, it can become more complex due to the division of management (board of directors) and owners (shareholders). Under our Company Law, owners have no right to manage the company. Hence the first potential problem is that shareholders have no control. If the company, controlled by the director, fails to carry out the objectives of the shareholders, what can the shareholders do?
Moreover, if you are a minority shareholder and the company decides to dilute your shares, what can you do? In a company where there are 2 equal shareholders in 50/50 arrangement, if there is a deadlock, what can be done?
Case Study – Director’s Misconduct
Our Client was one of 2 shareholders in a company incorporated to pursue investment opportunities in Australia. The other shareholder was the sole Director responsible for the daily running of the company. The Sole Director used his authority to transfer approximately $500,000.00 from the company for his personal purpose over the period of approximately 3 years. Our client only became aware of it after several years. Our client was denied access to the company books. This is a classic case of director’s misconduct.
There were no formal documents in place to enforce a system of checks and balances on the Director’s conduct and to hold him accountable to shareholders. There are no mechanisms in a formal document to displace the Director for misconduct. What can the shareholder do against the director?
Shareholder v Director
As a shareholder, you have certain rights under the Corporations Act. Where there is director misconduct, you may have resort to the following:
- Statutory Derivative Actions – in the event where you suspect or have knowledge of possible skullduggery on the part of one or more of the directors, they may be willfully acting in disregard of the duties owed by a director to their company and shareholders. This may entitle you to apply to the Court to sue the directors in the company’s name.
- Compensation – where the directors, through a breach of their duties have cause the company to experience loss, a claim for compensation may be available from the Court to address this wrong.
- Account of Profits – where the breach if directors’ duties has caused the directors to make a gain or profit at the company or the shareholders’ expense, you may apply to the Court to strip them of the gains made in breach of their duties.
- Disqualification – in circumstances where a director has acted in breach of their duties through quite egregious conduct, the Court may use its power to issue the directors with a ban on managing future companies for a certain time.
Shareholder v Shareholder
Where the dispute is between the shareholders themselves, the following remedies may be available:
- Oppression Remedies – in the event you are in a dispute with either majority or minority shareholders, and that dispute is connected with unfair or oppressive behaviour, you may be able to seek a large variety of remedies including compulsory buy-outs and amendments to the constitution.
- Winding Up – an extreme remedy in many cases, entailing the placement of the company into liquidation and selling all of its assets and ending with the company’s eventual de-registration. This remedy is sparingly used and reserved for situations where the Court believes that it is not able to operate further as in the case of deadlocks and other more drastic disputes.
In a partnership business, if there are only two partners and a dispute arises, it is possible to dissolve the partnership. This depends on what is written in the partnership agreement, where it should contain provisions for dealing with dispute resolutions. In the absence of a written agreement, in Western Australia, the Partnership Act (WA) 1895 will apply and a partnership agreement is implied by operation of this legislation.
It is important to note that every partner in a partnership business is personally liable for the entire debt of the partnership. Hence, entering into a partnership requires extra caution. What if it is too late as you are already in a partnership and your partners have already incurred substantial amount of debts for the business?
You need to act very quickly and take steps to secure your assets on the one hand and on the other hand, make sure the other partners will not get away with not paying their portion of the debts.
Joint venture are commonly taken in the form of company. In which event, the Corporations Law applies. Please above section “Incorporated Business – Potential Problems” for more information.
Where a joint venture is undertaken in the form of a trust, you will need to look at the terms of the trust deed (which governs the parties’ relationship and contractual obligations) to determine how to resolve the parties’ disputes.
If dispute arises between joint venture parties, the first place to go to is the joint venture agreement. This agreement should stipulate the manner in which disputes between the parties should be resolved. The purpose of this provision, in normal circumstances, is to protect the project or the investment made into the project. The last thing you want is for any dispute between the joint venture parties to cause detriments to the project and ultimately risk losing on the investment.
If one party is acting improperly to the exclusion of another party, the excluded party may take steps (such as by way of Mareva injunction) to stop the wrongdoer from continuing with the improper conduct. Injunction is aimed at preserving the status quo; that is, keeping your investment safe from any improper conduct. Every case is different and you should consult with us before taking any step.
Time to Gain Control
Commercial disputes are an intricate and complex area of law, especially in company law. Experience and knowledge of your lawyer is extremely important. Deploying effective litigation tactics can help you gain control of a losing situation. Please see below section on “WHY CHOOSE TANG LAW” to find out why you should engage us!