Expulsion Clauses – What Colour are your Socks?
1st July, 2014
This week sees the start of the 175th Henley Royal Regatta. As a rower, this is one of the highlights of my social calendar with the opportunity to watch top international crews racing and meet up with my old rowing buddies, all in a fabulous and very English setting.
Part of the fun of Henley is the people watching and that includes spotting all the club colours – displayed on blazers, ties, caps, trousers and even socks. The “best” socks to sport at Henley are cerise; that’s a shade of pink to the uninitiated and the club colours of Leander Club, probably the most prestigious rowing club in the world.
In case you were wondering (which is unlikely) I shall be wearing my scarlet socks to represent the Lady Margaret Boat Club. Lady Margaret Beaufort was the rather pious mother of Henry VII and probably not into rowing or sporty at all. She would, I suspect, have been rather more interested in excommunication than expulsion.
But what have my red socks got to do with expulsion from a partnership or an LLP?
The Partnership Act prohibits the expulsion of a partner from a partnership and the LLP Regulations prohibit the expulsion of a member from an LLP. Without an expulsion clause in a partnership agreement (or members’ agreement for an LLP), the only options are pretty drastic involving dissolution or winding up.
We therefore always advise partnerships and LLPs to have partnership (or members’) agreements and one of the clauses we usually put in these agreements is an expulsion clause. This allows the other partners (or members) to expel a partner (or member) under certain circumstances.
We always include bankruptcy, loss of professional qualifications, gross misconduct, criminal acts, having inappropriate relationships with staff, client, patients etc as reasons for expulsion.
There are situations, however, where one partner’s (or member’s) conduct does not quite reach the gross misconduct threshold – they’ve not been struck-off or been caught raiding the petty cash, but their general behaviour, attitude or performance doesn’t quite fit in with the other partners (or members) and there’s a feeling that the partnership (or LLP) would be better off without that person.
That’s where the “Red Socks Clause” comes in. I’ve sometime heard it called a “Green Socks Clause” or a “Pink Shirt Clause”. It is a no fault expulsion clause which gives partners (or members) the right to expel a partner (or member) for no cause.
There are some provisos. Partners and members are workers for employment law purposes and they cannot be discriminated against. You could not (nor should not for many reasons) use a red socks clause against a female partner (or member) because she becomes pregnant or against a disabled person or against anyone protected by any of the nine protected characteristics.
Red socks clauses also tend to be more problematic where there are fewer partners (or members). They certainly can’t work where there are only two partners (or members). They work best in larger firms with, for example, more than ten partners or members.
All partnership agreements and many LLP agreements include a duty of good faith, which means that the clauses cannot be open to malicious use, but used in the right circumstances can protect the collegial status of a firm and allow the firm to rid itself of those who do not fit in.
If you want any more information about no fault expulsion clauses, how to incorporate them, how to use them and what to do it you don’t have one, please contact Mark Briegal on 01244 405563 or at [email protected]. He can’t advise you on what socks to wear.
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