Best Falling Out With Your Business Partner: Arbitration for Firms and LLPs Lawyer

Partnerships often begin with trust between friends, relatives or colleagues, and end in bitter disputes when that trust breaks. One partner stops sharing accounts, another withdraws money, a third is pushed out, clients are diverted to a new firm, and nobody can agree on what each partner's share is worth. Because most partnership deeds and LLP agreements contain an arbitration clause, these disputes usually go to arbitration rather than to a civil court.

This page is for partners in partnership firms and limited liability partnerships, whether you want to leave, have been expelled, want your share of profits, or want the firm dissolved. In short: read the deed or LLP agreement for the arbitration clause and the exit terms; protect the firm's bank accounts, books and assets with urgent orders if needed; ask for full accounts; and value your share on a fair basis. Many partnership arbitrations end in a structured buy-out, which is usually better for all sides than a long dissolution.

Act early. The longer one partner controls the books and the bank accounts alone, the harder it is to reconstruct what happened.

Is this your situation?

Common partnership disputes

Partnership firms and LLPs: the key differences

A partnership firm is governed by the Indian Partnership Act, 1932. It is not a separate legal entity; the partners together are the firm, and each is personally liable for the firm's debts. Disputes are about the partners' mutual rights under the deed and the Act: shares, accounts, retirement, expulsion and dissolution.

A limited liability partnership is a body corporate under the Limited Liability Partnership Act, 2008, separate from its partners, who have limited liability. The LLP agreement governs the partners' mutual rights, and where it is silent, the First Schedule to the LLP Act applies. Paragraph 14 of the First Schedule provides that disputes between partners arising out of the LLP agreement shall be referred to arbitration under the Arbitration Act, unless the agreement says otherwise. So LLP disputes generally go to arbitration even if the LLP agreement has no clause.

For LLPs, some issues, such as oppression or the winding up of the LLP itself, may involve the NCLT. See NCLT lawyer.

How we handle partnership disputes

Time and typical cost range

Our fees are agreed in writing at the start, stage by stage, and are not linked to the outcome.

Documents needed

Remedies and when they suit

Unregistered partnership firms

Many small firms in India are not registered with the Registrar of Firms. Section 69 of the Partnership Act bars an unregistered firm, or a partner suing on its behalf, from bringing a suit to enforce rights arising from a contract against third parties, and bars a partner of an unregistered firm from suing the firm or other partners to enforce rights under the partnership deed. But Section 69(3) expressly saves the right to sue for dissolution of the firm, for accounts of a dissolved firm, and for realising the property of a dissolved firm.

There has been debate on whether "suit" in Section 69 includes arbitration. Some courts have held that the bar extends to arbitration claims, others that it does not. The safe course for a partner of an unregistered firm is to frame the claim, where possible, as one for dissolution and accounts, which is saved in any event, or to consider registering the firm before the claim if the deed and the facts allow. We assess this carefully at the start.

Getting the accounts

In most partnership disputes, the real question is money: how much each partner put in, how much each took out, what the firm earned, and what it is worth. Often one partner has controlled the books and the accounting software, and the other has only partial records. The tribunal can order production of the firm's books, bank statements, GST returns and accounting data, and can appoint an independent chartered accountant to reconstruct the accounts.

Ask early for the accounts to be taken from a fixed date, usually the last balance sheet that both partners signed or accepted. Earlier years are usually treated as settled unless there is evidence of fraud. Identify specific suspicious entries, such as unexplained withdrawals, payments to relatives, or sales recorded through a different entity, rather than asking for everything to be reopened.

Laws that apply

How we work

We are a litigation and advisory practice led by Advocate BK Singh, with offices in Dwarka (New Delhi) and Vaishali (Ghaziabad). This is what you can expect:

• Deed first: a close reading of the deed or LLP agreement before any step.
• Quick protection: Section 9 relief where accounts or assets are at risk.
• Accounts focus: working with chartered accountants to rebuild the numbers.
• Practical exits: buy-outs and structured payments where they work better than dissolution.
• Written fee terms: agreed stage by stage, never linked to the outcome.

Mistakes in partnership disputes

Partnerships at will and dissolution by notice

Where the deed does not fix a duration and does not provide how the partnership is to end, the partnership is "at will" under Section 7 of the Partnership Act. Under Section 43, any partner may dissolve a partnership at will by giving written notice to all the other partners. The firm is dissolved from the date mentioned in the notice, or the date of communication if none is mentioned.

This is a powerful tool, and it should be used carefully. Once a notice of dissolution is given, the business must be wound up: assets sold, debts paid and the surplus shared under Section 48. If one partner continues the business with the firm's assets after dissolution, the outgoing partner may claim a share of the profits made, or interest at 6% a year on the share of the assets, under Section 37. Before sending a dissolution notice, consider whether a buy-out would give a better result.

Family partnerships

Many partnership firms in India are family businesses: brothers, cousins, parents and children. Disputes in these firms often mix business and family issues, such as ancestral property, the family home, and personal relationships. The partnership deed covers only the firm's business, so an arbitration under the deed can decide only disputes arising from it. Property held outside the firm, or Hindu undivided family property, may need separate proceedings.

A family settlement that resolves all issues together is often the best outcome. Mediation can help here, and a settlement reached in mediation can then be recorded as an award on agreed terms under Section 30. See mediation services.

The partner as arbitrator

Older partnership deeds sometimes name the senior partner, or a particular partner, as the arbitrator for disputes. After the 2015 amendment, Section 12(5) and the Seventh Schedule make a person ineligible to be arbitrator if they have a business relationship with a party, including as a partner. A partner is therefore ineligible to decide disputes between partners, unless all parties waive the ineligibility by an express written agreement after the dispute has arisen.

If your deed names a partner as arbitrator, or allows one partner to appoint the arbitrator alone, you can ask for an independent appointment, through the court under Section 11 if needed. After CORE (2024), clauses that give one side the sole right to appoint are open to challenge in any event.

Valuing a partner's share

When a partner retires, is expelled or is bought out, the value of their share is often the central issue. Tribunals commonly rely on an independent valuer, who may use the net asset value of the firm (assets at fair value less liabilities), the capitalised average profits of recent years (for goodwill), or a combination. Work in progress, debtors, stock and the value of leases and licences all need to be considered.

The deed may fix a method, such as book value or a multiple of profits. If it does, the tribunal will usually apply it. If not, the valuer should be asked to explain the method chosen, and each partner can put forward its own expert evidence. A clear, early agreement on the valuation date avoids much of the dispute.

Protecting clients and confidential information

Section 16 of the Partnership Act requires a partner who carries on a business of the same nature as, and competing with, the firm to account for and pay to the firm all profits made in that business. Section 36 allows the deed to restrain an outgoing partner from carrying on a similar business within a specified period or local limits, if the restrictions are reasonable.

Where a partner is diverting clients, staff or orders to a new business, gather evidence quickly: emails, invoices issued by the new business, social media posts and statements from clients. A Section 9 application can seek an injunction and an order to preserve the firm's client data. In the arbitration, the claim can include an account of profits made by the competing business.

LLP-specific issues

In LLP disputes, additional issues arise. Partners' contributions under Section 32 of the LLP Act may be in money, property or services, and the LLP agreement should record their value. Designated partners have statutory responsibilities for filings with the Registrar of Companies, and a partner excluded from management may still be liable for compliance failures. A change in designated partners must be filed within 30 days.

If the other partners have filed forms with the Registrar removing you as a partner or designated partner without your consent, the LLP agreement and Section 24 of the LLP Act govern whether the cessation was valid. Raise this immediately in writing, and include it in the arbitration claim or a Section 9 application if the business is being taken over.