Breakdowns in Business Relationships

In any business run between family members or friends, the breakdown in those relationships can leave the business struggling and jeopardise its success. A recent case in the Scottish courts – McAllister, Petitioner (2024) – highlights the challenges faced by business partners after the breakdown of their personal relationships. It underlines the need to obtain clear legal advice when deciding upon how to proceed after the breakdown of a relationship between business partners.

Facts

Four brothers and their mother formed a partnership to run a scrap metal business. However, after the partners began to disagree on the running of the business, the petitioner sought to dissolve the partnership and appoint an interim judicial factor to run it. A judicial factor is an independent officer of the court who is tasked with preserving assets.

The petitioner sought the appointment of the interim judicial factor on an ex parte motion. This meant that the appointment was to be made without the other partners being aware of the application nor having an opportunity to be heard by the court.

In order to persuade the court to appoint the interim judicial factor, the petitioner argued that he was being denied access to financial information, payments were being made out of the firm's accounts to other partners, and the petitioner was being denied a role in the management of the firm. The judge hearing the motion found that it was necessary to appoint an interim judicial factor to preserve the partnership assets.

After becoming aware of the appointment of the interim judicial factor, three of the other partners sought to recall the appointment. The case was again before the court only a few weeks after the appointment of the interim judicial factor. They argued that it had not been necessary to appoint an interim judicial factor as it was a remedy of 'last resort'.

Decision

Where an interim judicial factor is sought before the other parties are aware, there is a clear 'duty of full and frank disclosure' of all material information. If this duty is not met, the court may subsequently discharge the interim appointment and refuse to make a new appointment even if the circumstances warrant it.

The judge was clear that had the petition for the appointment of the interim judicial factor been intimated to the other partners the court would have had the benefit of undisclosed material information. This was all the more important because there were disagreements between the partners. The absence of all material information and the draconian nature of the remedy of appointing a judicial factor led to the recall of the interim judicial factor.

The judge also provided helpful guidance on the appointment of future interim judicial factors. Where a business is running and profitable, the relationship breakdown is not likely to justify the appointment of a judicial factor. Where disputes could be resolved by using other remedies, these should be considered first, especially due to the high costs of appointing a judicial factor. For example, in the two weeks after his appointment, the interim judicial factor's costs in this case were more than £100,000.

Conclusions

Full advice on the options available on the breakdown of a business relationship is recommended. Whether you are a company director or partner, there are likely to be several options open to you. 

The appointment of an interim judicial factor, whilst a flexible remedy, should be carefully considered. The appointment poses risks. The financial costs of the appointment will need to be borne by the business or, like in the present case, by the petitioner if the appointment is made and afterwards recalled. As the judge made clear, other remedies should be considered first and these include interdict against fellow partners or directors or the dissolution of a partnership (winding-up of a company).

The commercial disputes team here at Brodies is able to assist you to navigate corporate disputes.