What happens when business partner dies?

[Shazzzbat]

Hi

 

Could someone tell me what happens when one of two business partners dies?

 

My friend's husband (I'll refer to him as K) died in May and he was in business with his sister, running a café. The partnership was not a formal one - ie no agreements were signed (I know - WHY?!) but K did pay a sum to his sister to "buy in" to the business.

 

K died intestate (again WHY?!). As you might imagine, this is causing a whole host of problems for my friend and I'm trying to help her unpick the knots.

 

My friend believes that her husband's 1/2 share of the business is part of his estate (which is in the hands of solicitors). My friend believes that the business should be valued and sold, with funds being split between the sister and K's estate. The business was put on the market before K died, but overpriced and has not sold. The sister refuses to bring down the asking price.

 

The sister maintains that if a valuation is required, then the probate solicitors should arrange it and pay. The probate solicitors don't seem to be addressing this issue and are being extremely slow. My friend is concerned that the sister is continuing to run the business as though nothing's happened, and is taking all the profit. She could engineer the accounts to appear that it is making a loss and therefore of no value for the purposes of probate.

 

The sister has continued to run the business, and obviously take all the profits. This strikes me as unfair and surely K's estate should have either 1/2 the business value or 1/2 the ongoing income. It could not be both, so the same should apply to the sister, surely?

 

When a partner dies, is there a requirement to sell the business?

 

Any advice would be massively appreciated

 

Thanks

Edited February 12, 2017 by Shazzzbat

[unclebulgaria67]

In the absence of any partnership agreement, the business is owned by the Sister. K just worked for his Sister.

 

If your friend wants to pursue the matter, then she would have to provide a Solicitors with sufficient information to stake a claim in the business by making a court claim. A court claim might be the only way of deciding this, given the lack of legal documents about ownership.

 

If this business had massive debts with creditors hammering on the door asking for money, would your friend be looking to take her husbands share of the debts ? I suspect your friend would be saying there is no evidence of her husband having any legal interest in the business.

[Shazzzbat]

Hi

 

thanks for the fast reply. In the assumption that the 1/2 ownership can be evidenced - is there a legal requirement for a valuation and sale? My guess if so is that the business should pay the costs of that. Is that correct?

[unclebulgaria67]

Hi

 

thanks for the fast reply. In the assumption that the 1/2 ownership can be evidenced - is there a legal requirement for a valuation and sale? My guess if so is that the business should pay the costs of that. Is that correct?

 

No assumption can be made.

 

Up to your friend to stake a legal claim first.

 

If she won, then no doubt she could make relevant applications regarding the business e.g valuation and sale.

 

I should imagine legal costs might make this very difficult to pursue.

[BazzaS]

In the absence of any partnership agreement, the business is owned by the Sister. K just worked for his Sister.

 

If your friend wants to pursue the matter, then she would have to provide a Solicitors with sufficient information to stake a claim in the business by making a court claim. A court claim might be the only way of deciding this, given the lack of legal documents about ownership.

 

If this business had massive debts with creditors hammering on the door asking for money, would your friend be looking to take her husbands share of the debts ? I suspect your friend would be saying there is no evidence of her husband having any legal interest in the business.

 

Evidencing the "buy in" will be key.

 

One doesn't "buy in" to be an employee being paid a salary.

Buying in implies putting money in that is at risk if the business fails, and equally a share of profit if the business succeeds.

This is then a partnership as " two or more persons carry on a business with a view to making a profit."

 

How was the deceased paid? "Drawings" from the business, or "salary" (with the attendant payslip, PAYE and NI details)?

[unclebulgaria67]

Evidencing the "buy in" will be key.

 

One doesn't "buy in" to be an employee being paid a salary.

Buying in implies putting money in that is at risk if the business fails, and equally a share of profit if the business succeeds.

This is then a partnership as " two or more persons carry on a business with a view to making a profit."

 

How was the deceased paid? "Drawings" from the business, or "salary" (with the attendant payslip, PAYE and NI details)?

 

Agree.

 

If the money was not paid into the business and accounted for, then it will be pretty impossible. If the money went into the Sisters private account and is not documented, then it would be up to a Judge to decide.

[Shazzzbat]

Hi

 

There is another thread in which I quote my friend. She states that K bought the 1/2 share in the business from another sister, who wanted to retire. He and his partner-sister would take cash from the business, so that would be drawings.

[unclebulgaria67]

Hi

 

There is another thread in which I quote my friend. She states that K bought the 1/2 share in the business from another sister, who wanted to retire. He and his partner-sister would take cash from the business, so that would be drawings.

 

Your friend needs to see a Solicitor with as much information as she can get hold of. Perhaps the Sister who retired is willing to confirm in writing that they sold K 50% share in the business.

 

I get the feeling that your friend does not get on with her sister in law, hence why you have posted to this forum. If they were on very good terms and willing to come to agreement based on sensible terms, then it would save on legal costs.

[Shazzzbat]

Hi. They used to get on ok until K died, at which point the sister became rather hostile and certainly is trying (as we all would) to protect her own financial position. She is not disputing the partnership. The problem is that she won't sell the business, or disclose any accounting/financial information, and pay K's estate what is due. Doesn't the law make clear that she must do so? She can't continue to trade and absorb K's share without any challenge, surely?

[unclebulgaria67]

Suggest your friend sends her Sister in law a letter stating that she will instruct Solicitors to issue court proceedings to resolve the current situation if necessary. State that she wants to come to an amicable settlement and to avoid legal fees. Give her 21 days to respond or legal proceedings will be started.

 

If no or negative response see a Solicitor to start a court claim.

[honeybee13]

Hello there.

 

I've moved your thread to General Legal and left you a link to follow from the self-employment forum.

 

HB

[steampowered]

Are you absolutely sure that the business was conducted through an informal partnership? For example, if the business was conducted through a legal company the legal analysis would be completely different (even if there were no formal agreements).

 

Assuming this is a true partnership, it is a slightly tricky situation because you do not really "own" a share in the partnership capable of being passed on through the intestacy process. The Partnership Act 1890 tells us that, if there is no agreement between the partners, the partnership dissolves on the death of one of the partners (http://www.legislation.gov.uk/ukpga/Vict/53-54/39/section/33). As the partnership no longer exists, there is no "share" of the business which could pass into probate. As the partnership would have terminated on death the sister is entitled to continue running the business as a sole trader and is not required to pass any of the profits into the estate.

 

What your friend does need to think about is whether the business owns any assets. In a partnership scenario the business assets would have been jointly owned. I doubt a leasehold cafe would have much in the way of assets to be honest. But if for example the business owned the freehold of the premises, that may be registered in the name of the husband and that would be a valuable asset which should pass into probate.

 

If your sister wants to push this, she should probably get proper advice on it. This would mean going to see a solicitor who is able to do a bit more than handle very basic uncontentious probate - the cheapest option would not be the best option.

[Shazzzbat]

Hi. Thanks for the info, all. This is very helpful. I will ask my friend to double check the basis of the partnership. I do know that 2 sisters went into business - on what basis I'll check. One sister sold her "1/2 share/interest" to K. The business, at the time he died, was on the market for £99k (leasehold) + SAV. No assets of note - it was a small café. If there was no agreement drawn up between K and his sister, but there was between the original 2 sisters, then would that agreement be passed to K upon him paying money? if not, what exactly was he buying?

[Shazzzbat]

Further to earlier posts - please note I (the OP) am NOT the widow of K. No matter though. In a nutshell, after more info received...this is the current situation with regards to the car.

 

Car purchased in November 2012 for £36K. Deposit of £6.9k paid in cash. K sold wife's car to raise this. Sales invoice states Close Motor Finance as owner and car delivered to K and he is logged as the registered keeper.

 

Finance agreement was with Close Motor Finance. 1st customer was K, 2nd was the sister. K did not believe his credit score would allow him the finance, so his sister agreed to be guarantor.

 

K made the monthly repayments from his company drawings.

 

What hasn't yet been mentioned here (this is a complex situation) is that K died whilst driving the car, causing it to crash. the insurance immediately kicked in and the finance was repaid. The car had actually increased in value to £37K and when sold, the balance was paid to the solicitors doing the probate.

 

The sister never paid anything to the loan and is not out of pocket in any way. Despite this, she is asserting to the probate solicitors that as she is named on the finance agreement, that she is owed half of the sale proceeds.

 

My friend believes that the car belonged to K and that L has no entitlement to any proceeds of the car sale. This issue has nothing to do with the sisters generosity (of spirit) in helping her brother purchase his dream car. My friend has been massively impacted financially by K's death and is having to fight to survive. It's not beyond the realms of possibility that she could ultimately lose her home.

 

While the probate solicitors will eventually sort this out, it could take months and the stress of uncertainty is making my friend ill. Establishing legal ownership of the car would go a long way to easing that.

 

I can upload the sales invoice and loan agreement (redacted) if it helps but this will now have to be tomorrow.

 

Many thanks, again, all.

[BazzaS]

Further to earlier posts - please note I (the OP) am NOT the widow of K. No matter though. In a nutshell, after more info received...this is the current situation with regards to the car.

 

Car purchased in November 2012 for £36K. Deposit of £6.9k paid in cash. K sold wife's car to raise this. Sales invoice states Close Motor Finance as owner and car delivered to K and he is logged as the registered keeper.

 

Finance agreement was with Close Motor Finance. 1st customer was K, 2nd was the sister. K did not believe his credit score would allow him the finance, so his sister agreed to be guarantor.

 

K made the monthly repayments from his company drawings.

 

What hasn't yet been mentioned here (this is a complex situation) is that K died whilst driving the car, causing it to crash. the insurance immediately kicked in and the finance was repaid. The car had actually increased in value to £37K and when sold, the balance was paid to the solicitors doing the probate.

 

The sister never paid anything to the loan and is not out of pocket in any way. Despite this, she is asserting to the probate solicitors that as she is named on the finance agreement, that she is owed half of the sale proceeds.

 

My friend believes that the car belonged to K and that L has no entitlement to any proceeds of the car sale. This issue has nothing to do with the sisters generosity (of spirit) in helping her brother purchase his dream car. My friend has been massively impacted financially by K's death and is having to fight to survive. It's not beyond the realms of possibility that she could ultimately lose her home.

 

While the probate solicitors will eventually sort this out, it could take months and the stress of uncertainty is making my friend ill. Establishing legal ownership of the car would go a long way to easing that.

 

I can upload the sales invoice and loan agreement (redacted) if it helps but this will now have to be tomorrow.

 

Many thanks, again, all.

 

If she never made any payments towards the car and was merely a guarantor : she has no beneficial interest in the car.

 

Where it may be more complex is if she tries to claim the partnership was paying for the car, and that it is an asset of the partnership, which existed (owned by both K and L) until K died.

Unlike a limited company (which has 'separate legal personalty' - it exists independently), a partnership doesn't 'stand on its own' ; its assets and liabilities are shared between the partners.

 

Did K take drawings, paid into their bank account, and then pay for the car, or did the payment go straight from the partnership's bank account?.

[unclebulgaria67]

Agree.

 

What your friend needs is some proof of her husband K paying for the car and that that there is nothing in the finance agreement that confers any interest to the Sister.

 

This is where is might become difficult, if K had been paying his Sister cash to cover the finance debit going through the businesses accounts. With a lot of small family businesses, they can take wages in cash.

 

I would have thought the probate Solicitor would just write back saying that the document provided does not prove any financial interest by the Sister in monies received for the car. It is purely acting as guarantor, if K did not make tne repayments. My only concern is the debits through the business account.

[Shazzzbat]

Thanks all. I will get the info you're asking for and upload a redacted loan agreement and sales invoice tomorrow. Your efforts are much appreciated

[Shazzzbat]

Hi all. I have uploaded all the documents I have. As this is getting confusing - and a key bit of information has come to light about K's business interests - this is a "timeline" below

 

 

Time line and key documents - Business interests and purchase of car

Abbreviations

PR: My friend – widow of KR

KR: Deceased. Ex husband of PR

CB: Sister of KR (& LM) who sold her ½ of business (Café) to KR

LM: Sister of KR (& CB) who was co-director of “the boutique ltd” with KR. Also partner of KR in “the café”.

Prior to May 2011: CB and KR went into business together (c18 years ago) to run a café. In 2011, KR & his sister LM formed a Ltd company to run a Boutique. In 2011 KR also paid another sister (CB) £30K for her ½ ownership of “The Café”. KR and LM ran both businesses concurrently. The limited company was solely concerned with the boutique and was not in any way involved in the business of the café.

Doc ref: 1

XX/05/2011 KR and his wife, PR, agreed to pay CB £30k for ½ stake in the Café. Document 1 shows down payment of £10k made in May 2011 (unsigned copy – signed copy likely to be at Café premises. Possibly signed at a Solicitor’s office -trying to find out!)

No document. Evidenced at Companies House

02/06/2011 KR & LM incorporated a new ltd company (I’ll refer to it as “the boutique ltd” – both listed as Directors with equal shares (1). Widow of K is listed as the Company Secretary. This was formed to run a fashion business, unrelated to the café. They ran it together in leasehold premises.

Doc ref: 2

01/08/2011 KR paid £20k balance towards stake in Café. (unsigned copy – signed copy likely to be at Café premises. Possibly signed at a Solicitor’s office -trying to find out!)

30/06/2012 Last accounts submitted to Companies House by “The Boutique Ltd”

Doc ref: 3

12/11/2012 Inv 4927 from UK Sports Cars, purchaser Close Motor Finance

Doc ref: 4

18/11/2012 Unreferenced inv from UK Sports Cars, purchaser KR (same car). We have emailed the dealer to find out what purpose this document served. No reply (yet).

Doc ref: 5

XX/XX/2012 Loan agreement for the finance for purchase of Lotus. Names on this agreement are “The Boutique Ltd” and the signatures of both KR and LM (but not stating position as company directors).

02/06/2013 Last return sent by “The Boutique Ltd” to Companies House

14/10/2014 “The Boutique Ltd” involuntarily dissolved. When “the Boutique” closed it had a few debts which are now paid off. LM had 90% of the stock to sell on Ebay and PR believes the business debts were settled with this money.

The company accountant for “The Boutique Ltd” informally told PR that it was wound up with no assets. This would indicate that despite the company being named on the car loan agreement, the purchase was not a company car. It wasn’t intended to be – the car was a performance sports car with no roof! LM is refusing to disclose these accounts.

As stated before, LM is not out of pocket in any way as a result of guaranteeing the loan for K's car, yet she is

asserting that she was co-owner and therefore owed 1/2 of the proceeds of the sale.

Doc 3.pdf

Doc 5.pdf

Doc 1.pdf

Doc 4.pdf

Doc 2.pdf

[silverfox1961]

Hi

I have had to unapprove the attachments as we can see personal details under the black marking. Can you please try again but ensure all identifiable data cannot be seen. Thanks

[BazzaS]

Complex.

 

When the ltd co. was in existence, who was making the payments for the car? KR or the Ltd company?.

 

It could have been a "company car" regardless of if it was suitable for use by the business, in so far as it could have been owned and paid for by the company.

n.b. the company could have been registered keeper of the car, or KR could have been registered keeper. Registered Keeper does not equal 'owner'.

 

If so, this may be where LM's claim on the car arises. When the Ltd co. was dissolved, its assets should have been "realised", and any surplus left after all debts are paid should be distributed to the shareholders, according to the proportion of their share.

If the car did belong to the company, and had an outstanding loan on it, then since the company no longer existed, either the car should have been sold, or 'bought' from the company by KR (and / or KR and LM)

 

so, who paid is the key, since that will also determine who owns what.

Did the Ltd company pay for the car?

Did the partnership take over paying for the car after the Ltd company?.

 

Did KR alone pay for the car?.

 

It is easy to be wise after the event, but they haven't made this easy for LM or PR.

[unclebulgaria67]

Seems to me that the business position is clearer than the car.

 

With the business, there is evidence to support interest in the business and a relevant portion for the estate of K can be worked out. But it might take action by a Solicitors to register this through the courts if necessary to safeguard PR interests. So when the business is sold PR receives what is due.

 

In regard to the car, this was bought by the business and payments made through the business. It might have just been used by K as a personal car and he might have paid his Sister the amounts due. But the documents show Boutique Ltd. Can't see that your friends Solicitor can keep hold of all of the money from the cars sale.

 

Wait for others to comment. As others are better placed with more legal knowledge.

 

To be honest, i think your friend has no real choice, but to get a Solicitors to handle this as it i don't think your friend and her Sister in law are going to be able to settle this between them.

[Shazzzbat]

Apologies. All docs attached in 1 scan now

Docs 1-5.pdf

[BazzaS]

As there was no partnership agreement, the partnership was dissolved on KR's death.

LM is obliged to wind up the partnership, and KR's estate is entitled to 1/2 of any assets (or equally, liable for 1/2 of any losses!)

 

the executor/trix or personal representative for KR should ensure the business is valued (for the date of death) both to ensure KR's estate receives what it is owed, and for inheritance tax purposes.

 

Whilst LM is obliged to wind up the partnership, they can continue as a sole trader in the meantime. They do so at their risk, though : if the value of the business plummets, they still have to pay KR's estate what was owed for what the business was worth at date of death (similarly, if it booms, KR's estate doesn't share in the increase in value after death).

LM has to wind up the partnership in a "reasonable" timeframe. Reasonable is one of those words that can mean many things! ; it will depend on each individual set of circumstances, and (for example), continuing to trade while concluding an existing contract would lkkely be held to be reasonable.

[Shazzzbat]

Hi. This is all very, very helpful and I'm beginning to understand the situation. I've asked my friend for more explanation of who actually made the loan repayments and how (ie from which bank accounts).

 

 

I do know that KR was the registered keeper of the vehicle.

 

 

Can't thank you all enough!

[Shazzzbat]

Hi all. My friend does have a solicitor (engaged to deal with the probate), but they're being very slow and don't seem to ask the right questions or identify the right issues. Based on the posts, I have drafted this wording that my friend is going to send to them. I thought it was best to keep the issue of the partnership and the car purchase separate. This deals with the partnership arrangement.

""

Please may I request that you update me as to progress with the probate of my late husband’s estate and in particular address the concerns that I list below:

My late husband was half owner of “The Cafe” with his sister L M. The partnership was dissolved on the death of my husband and therefore, LM is obliged to wind up the partnership. I have sent you documentation that evidences that "The Café" was actually on the market with XXX Commercial Estate Agents at the time of KR's. It had been valued at £99,000, which was the asking price.

Whilst LM is obliged to wind up the partnership, she has continued as sole trader in the meantime. She does so at her own risk, though. If the value of the business falls, she must still pay KR's estate what was owed for what the business was worth at date of death £99,000). I do understand that similarly, if the valuation rises, KR's estate doesn't share in the increase in value after death).

As you now have evidence of the business value (emailed to you 14/02/17), will you be writing to LM requesting that she pays KR's the 50% (£49,500) value at date of death and making clear to her that this value is fixed and her sole trading after KR's death is at her own risk? If it is not your intention to write to her in this regard, then I would like to know why not.

LM has to wind up the partnership in a "reasonable" timeframe”. KR died 9 months ago. Reasonable is one of those words that can mean many things ; it will depend on each individual set of circumstances, and (for example), continuing to trade while concluding an existing contract, would likely be held to be reasonable. They didn't have any contractual delivery or HR contracts however and I can see no reasonable reason why this is being delayed.

Please could you let me know what you consider to be a reasonable time frame?

In summary, please confirm to me that you will be writing to LM as outlined above, provide me with a written update as to probate progress and indicate to me what a “reasonable time frame” is with respect to LM paying KR's estate what is owed.

""

Just getting to the point where we're able to write that is a big step forward in trying to move things on. I'm sure they're very au fait with the law (you'd hope so!) but a couple of things they've done have been a little questionable. The intention in emailing them is to have them ascertain the legal position and compel LM to settle her dues, which, in 9 months, they have been able to do. I have every confidence in what you've told us, so I wouldn't expect the solicitors to challenge any of the statement's made. If there are inaccuracies or wrong assumptions, then I'm sure they'll put my friend straight.

Thanks again.