We deal with the personal risk and liabilities for partners where the trading partnership is ceasing. Reasons include a dispute between the partners, death or insolvency. We guide you through the process looking to minimise risk.
Reasons for working with us
We work with partnerships acting for either the partnership or the partners personally. The specialism gives you the benefit of years of experience.
- Our skills include bringing and defending litigation and disputes in the courts if necessary. We can deal with commercial fraud, and obtain injunctions to cease assets and/or prevent damaging activity. But, our goal is to avoid litigation.
- Where necessary we represent partners being investigated by the Insolvency Service and other regulatory bodies.
- We can look at all of the issues arising such as expelling partners against their will.
Based on questions we are asked relating to the dissolution, insolvency or winding up of partnerships we have summarised some of the key points to consider.
- Dissolving or winding up solvent partnerships;
- Negotiating the agreement between partners; and
- Risks for partners upon insolvency.
Dissolution or winding up of solvent partnerships
The process varies depending upon the type of partnership and the circumstances behind the dissolution or winding up.
- Business partnerships; and
- LLPs – limited liability partnerships
With partnerships which are not LLPs there are circumstances where the partnership will automatically expire on events such as a partner leaving or death unless otherwise provided in the partnership agreement. One advantage of LLPs is that the business will continue independently of partners coming and going.
The court can dissolve a partnership on several grounds, including that dissolution is just and equitable, because for example:
- The partnership comprises only two partners, who have fallen out;
- The business can only be carried on at a loss.
Another common ground is that a partner is:
- Incapable of carrying on the business;
- Guilty of conduct that detrimentally affects the carrying on of the business;
- Is wilfully or persistently in breach of the partnership agreement; or
- Behaves in such a way that it is not reasonably practical for the other partners to be in business with him.
Risks for partners upon solvent dissolution or winding up
There are many issues to resolve which will vary depending upon the facts. Negotiation usually leads to an agreement between the partners to dissolve the partnership or wind up the LLP.
Terms to be considering under a partnership dissolution or winding up agreement
The final dissolution agreement usually covers:
- Liability for any debts – often indemnities are provided;
- Which partner(s) take over the business name, existing clients and work in progress;
- Who owns the intellectual property and trade secrets
- Broken contracts – partners may be personally liable if the business contracts are breached by the partnership;
- Liabilities under personal guarantees;
- Distribution of assets, e.g stock, customer lists and contact details;
- Final partnership accounts, including final tax payments, which are often complex;
- Management of the partnership’s records;
- Continuing professional indemnity insurance e.g. run-off insurance.
Risk arising with insolvency
A partnership has no separate legal personality and so cannot be the subject of any legal proceedings on its own merits. Risk arises generally because the partners are personally liable – usually without limit – for the debts of the partnership.
Greater risk arises upon insolvency as partnerships are treated as legal entities in their own right for insolvency purposes. This means that due to the unique nature of a partnership, a creditor can pursue any one or more of the partners individually – as well as the partnership itself – for any partnership debt.
Risk of personal responsibility
Where a partnership is insolvent, partners will face the same sanctions as directors of companies for misconduct, wrongdoing or inaction and may be disqualified. The court will consider the partner’s conduct, individually and in connection with the other partners, to determine whether they are fit to be involved in the management of such a partnership. In addition to personal liabilities, partners, like directors, may be held responsible for wrongful or fraudulent trading or trading whilst insolvent.
One of the consequences of insolvency is that the insolvency practitioner has a duty to send the Secretary of State a report on the conduct of all partners within the last three years leading up to the insolvency. The Secretary of State has to decide whether it is in the public interest to seek a disqualification order against a partner. The position is similar for directors.
Common risk areas
Examples of the most commonly reported conduct might include:
- continuing to trade when the business was insolvent
- failing to keep proper accounting records
- failing to prepare and file accounts or make returns to Companies House
- failing to send in returns or pay any tax that is due.
LLP members and shareholders of a company may choose to enter into a voluntary arrangement with their creditors, which, once agreed, will be binding on all creditors present at the meeting.
Risk of bankruptcy
A partnership creditor or member can petition the court for the winding up of an insolvent partnership, where that partnership has traded in England and Wales in the previous three years. They can also make a bankruptcy petition against one or more partners or they may bring both petitions against the partnership and the partner(s) simultaneously.
Where the creditor petitions for a bankruptcy order against an individual partner for a partnership debt, because of the partner’s unlimited liability, this debt is treated as the debt of the partner who is the subject of the bankruptcy petition.
Personal bankruptcy forces dissolution
Where a partner is made personally bankrupt the position is that the partnership will be dissolved. The partnership agreement should therefore be carefully drafted to exclude this standard position.
Although a partner’s bankruptcy does not automatically disqualify them from being a partner, the practical disadvantages, such as having their share vested in their trustee in bankruptcy, often mean continuing in the partner role is unfavourable. In the event of bankruptcy, any professional practising certificates held by the partner may be suspended.
A partnership or an LLP can also be put into administration in the same way as a limited company: by the partners or creditors, in or out of court. This enables a viable partnership business to survive as ‘a going concern’. In such circumstances, the partnership may also be able to obtain the creditor’s approval to enter into a voluntary arrangement.
Where an administrator is appointed out of court, the members of a partnership must sign a statutory declaration that the partnership is unable to meet its debts as they fall due. This is similar to the statutory declaration of solvency signed by the directors of a limited company in a voluntary liquidation.