Distributions - Partnerships (ISCIS)

Distributions - Partnerships (ISCIS)

March 2011

Introduction

This chapter part provides additional guidance specific to distributions in partnerships.

For further guidance on the procedure for distributing funds to creditors see Case Help Manual (CHM) parts : Distributions: - Bankruptcy & Companies Distributions- pre-Distribution and Expense matters – Company and Bankruptcy (ISCIS) and Distributions - Company and Bankruptcy (ISCIS). 

For further information on partnerships generally see CHM part : Partnerships.

1. How does the new financial regime affect distributions?

On 1 April 2004 The Insolvency Service's financial regime was revised to simplify the fee structure applicable in relation to insolvency proceedings and the official receiver’s duties. (In part different considerations apply to pre-1 April 2004 cases.) For bankruptcies and liquidation cases a  single administration fee B1/W1 for official receivers applies but this does not cover the function of the official receiver, as trustee or liquidator, distributing funds to creditors.

For the activity of distributing funds to creditors the official receiver may charge general remuneration based on a time and rate basis, as set out in The Insolvency Regulations 1994 (as amended. This is applicable to all distributions made on or after 1 April 2004 whether the insolvency order was made pre or post 1 April 2004. Time spent on returning the petition deposit or paying the petition costs is not charged for (in this way).

Were an official receiver  to conduct a distribution in a case, where prior to 1 April 2004 a distribution had been made for which a distribution fee was charged in the then usual way, that should not be disturbed but the subsequent distribution should be charged for by applying the post 1 April 2004 regime.

2. What is a partnership?

Section 1 of the Partnership Act 1890 defines a partnership as “the relation which subsists between persons carrying on a business in common with a view of profit”.

Under the law of England and Wales a partnership is not a separate legal entity from its members and each partner can sue and be sued personally as well as in the name of the partnership. Creditors can choose to pursue one or more of the partners personally, rather than pursue the partnership, for partnership debts.

It is possible for a partnership to consist of other partnerships and for partners in a partnership to be companies.

Nothing in this part applies to the winding-up of a limited liability partnership.

3. What are the main differences between a partnership and a company?

In England and Wales a partnership does not exist as a legal entity whereas a registered company does. The partnership is an association of its members, who can be any combination of individuals or limited companies. A company will own its own assets but a partnership cannot own assets; it only has the benefit of assets which are owned by the partners. The controllers of a partnership, its partners, are usually personally, without limit, responsible with the partnership for the payment of the partnership’s debts.  The controllers of a company, its directors and shareholders, are not liable or have a limited liability for the debts of the company. There is no system for registering ‘ordinary’ partnerships with the Registrar of Companies. Partnerships may be formed, operated and dissolved with a degree of informality whereas the registration, management and dissolution of a company is more widely regulated.

(See Technical Manual (TM) Chapter 53A and CHM part : Partnerships for details of a limited liability partnership commonly referred to as an LLP). 

4. How can a partnership be wound up?

The Insolvent Partnerships Order 1994 provides five routes by which a partnership may be wound up under the existing insolvency legislation as follows:

  1. Winding it up as an unregistered company without any petitions against the members or former members. The petitioner is either a creditor, a “responsible Insolvency Practitioner” or the Secretary of State (Article 7 of the Insolvent Partnerships Order 1994).
  2. Winding it up as an unregistered company with petitions against one or more of the members or former members. Petitioner is a creditor (Article 8, IPO1994).
  3. Winding it up as an unregistered company without any petitions against the members where the petitioner is a member of the partnership (Article 9, IPO1994).
  4. Winding it up as an unregistered company with petitions against all the members. Petitioner is a member (Article 10, IPO1994).
  5. Joint bankruptcy petition by the members without the winding up of the partnership as an unregistered company; although the order gives the trustee of the bankruptcy estates authority to wind-up the affairs of the partnership (Article 11, IPO1994).

For partnership cases wound-up under the Insolvent Partnerships Order 1986, generally speaking those with orders made prior to 1 December 1994, different rules apply. If you have difficulties in dealing with such a case, reference may be made to Technical Section.

5. Estate Accounting in partnerships

The key thing to do to achieve success in undertaking the estate accounting in partnership insolvency correctly, is to open the correct estate accounts and to ensure that receipts are credited to the correct account and payments are debited from the correct account, as appropriate.

For the partnership itself, a joint estate account is opened. For each member of the partnership against whom an insolvency order has been made, a separate estate account is opened. All transactions relating to the partnership winding-up are entered into the joint estate account. Similarly, all transactions relating to the insolvency of a partner are entered into the appropriate separate estate account. All transactions should be allocated correctly in this way. There is no case for ‘lumping’ all transactions into one account.

The five routes through which a partnership may enter insolvency are handled by one of three administration routes in ISCIS. For guidance on how to both record partnership cases and deal with the case administration in ISCIS, see the ‘Partnership’ protocol.

6. What are the accounting differences for partnerships?

The differences for dealing with deposits and the official receiver’s administration fee for partnerships and any related partner insolvencies are set out below:

 

Ordinary’ Partnerships(Articles 8 and 10)

Article 11 Partnerships (Form 16)

Distinguishing features

 WUO against partnership with or without BO against any individual partner or WUO against any corporate partner. All separate court numbers (as appropriate).

Joint bankruptcy order against every partner, trustee of partners’ estates acts as trustee of partnership. No WUO against partnership. All under same court number. (A joint estate account and separate estate accounts will be opened in ISCIS under the same court number but each with unique case ID numbers.)

Petition deposit

One petition deposit applied to the partnership estate. No deposit paid into the separate estates.

One deposit apportioned equally between each partner’s (separate) estate - not to the joint estate.

Official receiver’s Administration Fee

Charged to any separate estate and to joint estate.

Charged to each separate estate - not to the joint estate

7. What are the priority of expenses?

The Insolvent Partnerships Order 1994 has modified certain sections of the Insolvency Act 1986 relating to the priority of debts and expenses when dealing with the winding up of a partnership with concurrent bankruptcy or winding-up orders made against one or more of its members.

The golden rule to be applied in such situations is that no payment may be made to any (unsecured) creditor unless all of the expenses (of all) of the insolvency estates have been paid in full. If this has not happened, either the situation is exceptional, and you should seek advice, or something has gone wrong which needs to be corrected when advice should also be sought.

The expenses are paid as follows:

  1. Firstly, the joint estate of the partnership bears the joint expenses and each separate estate bears its own expenses.
  2. Where there is any unpaid balance of expenses on the joint estate, it is apportioned equally between the separate estates.
  3. If there are any unpaid balance of expenses on a separate estate, these form part of the expenses to be paid from the joint estate.
  4. Thereafter, any unpaid debit balance on any of the estates is further apportioned equally between the other estates.
  5. Thereafter the total of all remaining unpaid debit balances are again further apportioned equally between the other estates.

This continues until the expenses are either paid in full or there are no funds remaining to pay the expenses, in which case the unpaid debit balances are apportioned equally between all the estates. (See TM Chapter 36 part 5 paragraph 36.86 and Annex A attached to this part.)

If an estate has a credit balance remaining after all these functions have been performed, a payment from that particular estate may be made to the creditors of that insolvency (but see paragraph 8 below).

The above rules do not apply when dealing with the winding up of a partnership with no concurrent petitions against a member of the partnership because there is only one estate.

In certain circumstances, for example where there are ‘independent’ insolvency orders against the partnership and one or more partners, the consolidation of the cases under Article 14 might prove to be financially advantageous (in the payment of otherwise unpaid insolvency expenses). If so, that action should be taken before the accounting for the insolvency expenses has been finally completed. See CHM part : Consolidations for information and guidance.

8. What happens to the deposit and payment of petition costs?

With the exception of joint debtors’ petitions ( Article 11, Form 16) the petition deposit is credited to the partnership (joint) estate and therefore the payment of any petition costs would be repaid from/made from that estate. Following the accounting rules referred to above, if they are to be paid, these costs must be paid before a distribution can be made to any creditor. In cases where the petitioner is a member of the partnership, or in a joint debtors’ petition, no (external) re-imbursement is required to pay these costs as it is likely that they would have been met by the partnership and/or the individuals when the petition was presented. Generally, there are no petition costs to be paid/repaid in a joint debtors’ petition case (Article 11, Form 16).

9. What if there is a debit balance on the joint or separate estates?

As explained in paragraph 7 where there is a debit balance on the joint estate, the amount unpaid should be divided equally between the separate estates. The transferred balance forms part of the expenses of the separate estates and, as such, where there are sufficient funds they will rank equally and become payable at the same time as the expenses of the separate estates. Similarly, where a separate estate is insufficient to pay its expenses, the unpaid balance becomes part of the expenses to be paid out of the joint estate, payable at the same time as the joint estate expenses.

For an example of how this works, see Annex A – Debit Balances on Partnerships.

As stated above, the golden rule to be applied in such situations is that no payment may be made to any (unsecured) creditor unless all of the expenses (of all) of the insolvency estates have been paid in full.

10. What is the liquidator's or joint estate’s cross claim ?

Where the joint estate is not sufficient for the payment of all of its debts, the official receiver, as the liquidator of the partnership (or trustee of the partnership estate in article 11 cases), should total the value of the unpaid debts (both preferential and non-preferential) and claim this amount against the separate estate of each member of the partnership. This is referred to as a ‘cross claim’. This only applies to cases under Articles 8, 10 and 11 and where there has been a consolidation order under Article 14. It cannot apply either under Articles 7 and 9 (as there are no separate estates) or where the cases are effectively all separate i.e. are not being fully administered under the IPO94. This cross claim will then rank equally with the other ordinary unsecured debts of each separate estate. This means that any unpaid balance of a preferential debt in the joint estate is not classed preferentially in the separate estates.

11. Are any fees charged when transferring funds from the estates?

The official receiver's remuneration must not be charged on any amount transferred from a surplus on the joint estate to a separate estate or on a distribution from a surplus on a separate estate to the joint estate or other separate estate of a member of that partnership.

12. How are the transfer of funds made?

Requests to transfer funds from one estate to another and to make the necessary entries onto the ISCIS Financials accounts should be made to EAS by completing the ‘Transfer Receipt or Payment Request’ form, to be found on the ORBS home page under ISCIS Documents.

13. What if a surplus exists on the joint estate?

Where a surplus exists on the joint estate after payment of expenses and creditors’ claims, it should be distributed to the separate estates according to the members’ respective rights and interests in the partnership i.e. per the partnership agreement (if any). Refer to your (S)OM to determine such claims rights and interests.

14. What happens to any surplus on the separate estates ?

Any surplus remaining on a separate estate after payment in full of all its expenses and claims should be returned to the member after the accounts have been audited. However, in the majority of cases, it is, unlikely that there will be any surplus remaining on a separate estate as any well-funded separate estate will bear the burden of paying the expenses arising from the joint estate as well as the unpaid expenses of the other separate estates

15. What are the priority of debts for the joint estate?

The order of payment of debts (of the partnership) from the joint estate is:

  1. preferential debts (see CHM Distributions- Company and Bankruptcy (ISCIS) paragraphs 5-7)  
  2. the debts which are neither preferential nor postponed debts(ordinary unsecured debts)
  3. statutory interest under section 189 on the joint debts(other than postponed debts)
  4. the postponed debts
  5. statutory interest under section 189 on postponed debts
  6. surplus to the (insolvent) members (possibly as an asset in their bankruptcy)

Any shortfall which remains after part payment of the debts in categories 1 and 2 above is then claimed by the liquidator/trustee proving in each of the separate estates for the full amount of the shortfall. The claim by the liquidator/trustee ranks equally for payment with the unsecured creditors in the separate estates. See TM Chapter 36A.121-122 and TM Chapter 36A Annex B for further details and a worked example of a distribution from joint and separate estates. 

A postponed debt in a liquidation case usually arises in respect of a loan where the rate of interest varies according to the profits earned by the partnership. In a bankruptcy a postponed debt could be one owed to a spouse or civil partner. (See TM Chapter 36A.125.)

16. What is the priority of debts for the separate estates?

The order of payment of debts in the separate estates is:

1. preferential debts

2. the debts which are neither preferential nor postponed debts (ordinary unsecured debts including any liquidator's of the partnership (or trustee of the partnership estate in article 11 cases) claim from the joint estate)

3. interest under section 189/328(5) on these debts

4. postponed debts  

5. interest on the postponed debts

6. surplus to the bankrupt or shareholders of the company.

For a  worked example see TM Chapter 36A Annex B.

17. Payment of interest on debts (Statutory interest)

Any surplus left after payment of the debts that are not preferential nor postponed, should then be used to pay interest on the debts outstanding  since the winding-up order was made either against the partnership or any corporate member (as the case may be) or the bankruptcy order was made against any individual member (to the date of payment of the debt). See TM Chapter 36A.127 for more information when interest should be paid.

Notes:

a) No member of a partnership may prove for a joint or separate debt in competition with the joint creditors unless the debt has arisen as a result of fraud or in the ordinary course of business carried on separately from the partnership business.

b) The official receiver is not entitled to remuneration for his/her services in connection with:

  • the transfer of a surplus from the joint estate to a separate estate
  • a distribution from a separate estate to a joint estate, or
  • a distribution from the estate of a separate partnership to the separate estates of the members of that partnership.

Where can I find out more?

The Insolvent Partnerships Order 1994 (as amended)

The Insolvency Regulations 1994 (as amended)

The Insolvency Proceedings (Fees) Order 2004 (as amended)

Technical Manual

Chapter 36 Estate Accounting

Chapter 36A-Distributions

Chapter 53 Partnerships

Case Help Manual

Consolidations 

Closing a Case

Distributions- pre-Distribution and Expense matters – Company and Bankruptcy (ISCIS) 

Distributions- Company and Bankruptcy (ISCIS) 

Partnerships 

ISCIS Protocols

Partnerships

Forms to be used:

There are no specific partnership forms to use for distribution purposes. Please refer to the forms part of the CHM part : Distributions – Company and Bankruptcy (ISCIS) 

Transfer Receipt or Payment Request form

Annex A

 

Partnership Separate Estate Case Flowchart

Partnership Joint Estate Case Flowchart 

 

Procedure 

ISCIS references are shown in brackets, e.g. (‘Docs’)

Most distributions will be carried out by the National Dividend Unit (NDU). In practice the procedure for distribution should be planned in advance with all of the distributions taking place on one day.

1. The procedure for distributing funds in a partnership is basically the same as that for companies and bankruptcies, particularly as regards the rules concerning time limits, admitting proofs, calculating the dividend payable, advertising notice of intended dividend etc. (see the guidelines set out in the CHM part : Distributions- Company and Bankruptcy (ISCIS)). The main difference is the ‘theory’ behind dealing with the funds on an estate after payment in full to the preferential creditors of that estate. The principle being that if there is a surplus on any separate estate (after payment in full to the preferential creditors of that estate), the funds will then become available to the unpaid claims of the joint estate creditors (both preferential and non-preferential) alongside the non-preferential creditors of the separate estate (by way of the cross claim (see paragraph 10 above)).

2. There is an illustrative example of distributions from the joint and separate estates (where there is a credit balance on each estate) shown in TM Chapter 36A Annex B.

3. A partnership that has been wound up as an unregistered company with no bankruptcy orders against any of its members should be dealt with as if it were a company. Follow the guidelines set out in the CHM part: Distributions- Company and Bankruptcy (ISCIS).  

4. Where there is a credit balance on one of the separate estates with debit balances on each of the other members’ estates and the joint estate resulting in an overall debit balance, the balances should be added together and divided by the number of the estates to obtain the debit balance for each estate (see Annex A attached to this part – Debit Balances on Partnerships which details step by step how the apportionment is arrived at).

5. Where, after the payment of the expenses of all the insolvency estates, there remains a credit balance on an estate once all the expenses have been settled, the available assets will first be applied to pay the preferential creditors of that estate. For details on how to deal with preferential creditors, please refer to the CHM part : Distributions – Company and Bankruptcy Cases (ISCIS) the procedural part of which is covered in step 3 onwards.

6. If there still remains a surplus after payment in full to that estate’s preferential creditors, or if the estate has no preferential creditors, the total deficiency on claims in the joint estate (both preferential and non-preferential) then become provable debts in each of the separate estates.

7. This aggregated amount from the joint estate ranks equally with the non-preferential claims of the separate estate.

8. Treat any distribution from a separate estate to the joint estate as the realisation of any other asset but do not charge official receiver's Time and Rate fee or the Secretary of State’s administration fee on it.

9. Below is an example of these rules in practice, where there is a credit balance on only one of the separate estates:

 

Joint Estate

S/E Smith

S/E Jones

Balance

0.00

 0.00

1,500.00

Prefs

2000.00

 0.00

0.00

Unsecured

70,000.00

17,000.00

15,000.00

    

10. The liquidator of the partnership (Joint Estate) claims the balances of unpaid creditors’ claims against the separate estates of Smith and Jones for £72,000.

The effect of this is as follows:

 

Joint Estate

S/E Smith

S/E Jones

Balance

 0.00

0.00

1,500.00

Prefs

2,000.00

0.00

0.00

Unsecured

 70,000.00

 89,000.00

 87,000.00

11 Previous balances are increased by £72,000.00 i.e. the addition of the joint estate creditors’ claims (£2,000 preferential and £70,000 unsecured) but will only rank as unsecured creditors when a dividend is paid from the separate estate of Jones, the only estate with a credit balance.

12 The liquidator of the partnership receives a dividend and these monies, or part thereof, are used in the joint estate to pay the preferential creditors following the steps outlined in procedural points 3-6 of the CHM part : Distributions – Company and Bankruptcy Cases (ISCIS).

13. The official receiver is not entitled to charge remuneration on the amount of the dividend to be distributed to the liquidator of the partnership, who has made a claim for the joint estate creditors.

14. Neither the official receiver's Time and Rate fee nor the Secretary of State’s administration fee should be charged on the amount transferred from a surplus on the joint estate or on a distribution from a separate estate to the joint estate or other separate estate of a member of that partnership.

15. Prepare the appropriate forms to creditors on ISCIS as detailed in procedural points 7 onwards of the CHM part : Distributions – Company and Bankruptcy Cases (ISCIS) (‘Docs’ tab’).

16. If applying for release, follow the workflow process in ISCIS. Where a dividend has been paid update ISCIS ‘Datastore’ tab with details.

17. If the case has been re-opened check that the status (ISCIS ‘ Case Header’) reflects that the case is now closed and save necessary documents to the office file.