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Dissolution of a Partnership

Snapshot:

A partnership may be terminated in different ways, including:

Technically, any change in the partners making up the firm will dissolve the partnership, however, most partnership agreements provide that in these circumstances there is no winding up of the partnership.

back to topAutomatic dissolution of a partnership

The following events will cause the automatic dissolution of the partnership:

  • Expiry of a fixed term - if the partners have agreed a fixed term to carry on as a partnership the partnership will be dissolved unless the partnership agreement provides otherwise.
  • Death or Bankruptcy - the death or bankruptcy of a partner will terminate the partnership to enable the personal representatives of the deceased to collect the former partner's entitlement.
  • Illegality of the Partnership - the partnership will dissolve if it becomes illegal to carry on the business of the partnership. For example, in relation to a law firm where a partner has his practising certificate suspended.
  • Notice - if a partnership at will arises then any partner may serve notice of dissolution on the others.
  • Rescission - if the partnership is rescinded for fraud or misrepresentation.

back to topDissolution by agreement

The partners may unanimously agree at any time to dissolve the partnership. The partnership agreement may provide for a majority of the partners to agree to dissolve the partnership.

back to topCourt order for Dissolution

One or more of the non-defaulting partners in the partnership may apply to the court to dissolve the partnership in any of the following five circumstances:

  • Permanent incapacity - the permanent incapacity of another partner (which excludes mental incapacity).
  • Conduct - the conduct of another partner is calculated to prejudicially affect the business.
  • Wilful or persistent breach - the wilful or persistent breach by another partner of the partnership agreement or other conduct which makes it not reasonably practicable for the other partner or partners to carry on the business in partnership with that partner.
  • Loss - the business of the partnership can only be carried on at a loss.
  • Just and equitable - the court considers dissolution to be just and equitable.

The court's power to order the dissolution of a partnership is discretionary.

Winding up

On dissolution, the next step is to wind up the business. After dissolution, each partner continues to have authority to bind the firm so far as necessary to wind up the affairs of the partnership and to complete any work undertaken prior to the dissolution.

What happens if there is no partnership agreement?

If there is no contractual agreement in place between the partners then the relationship will be governed by the Partnership Act 1890. Most partnerships chose to override some of the provisions of the Partnership Act 1890 (e.g. that the partnership will dissolve if one partner leaves the partnership) by entering into their own agreements. It is therefore important when establishing a partnership to consider whether there are any provisions in the Partnership Act 1890 which will not apply to the partnership and if there are, to set out the key contractual terms in an agreement between the partners.

Provisions which you may want to include in a partnership agreement

  • detailed provisions if a partner dies or goes bankrupt
  • detailed provisions regarding outgoing partners - e.g. leaving accounts
  • detailed provisions for the expulsion of a partner
  • post termination restrictions - e.g. non-compete
  • provisions for dissolution - e.g. by notice or on the death of a partner

Issues that can arise when a partner leaves the partnership

Some partners will be deemed to be employees of the partnership rather than genuine partners. There are a number of areas to consider when determining whether a partner is an employee or not, including whether they are fixed share or equity partners.

If a partner is deemed to be an employee rather than a genuine partner they will qualify for statutory employment protection (such as the right not to be unfairly dismissed).

Even though genuine partners do not qualify for many employment protection rights, they have the same rights as employees to be protected against unlawful discrimination on grounds of sex, race, disability, sexual orientation or religion and beliefs. However, genuine partners are treated differently to employees in relation to age discrimination. Genuine partners do not have protection from discrimination on grounds of unequal pay.

This paper is designed to provide a summary of the issues addressed. Therefore, it is not intended as a detailed commentary on the relevant law and any comments made should not be acted upon without first taking specific legal advice.

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