Part 7 Final distribution and application of assets in partnership cases
The provisions of the Insolvent Partnerships Order 1994(IPO94) section 175A apply as regards priority of debts in a case where IPO94 article 8 applies (winding up of an insolvent partnership on a creditor’s petition, where concurrent petitions are presented against one or more members of the partnership). Only after the payment of expenses detailed at Chapter 36 paragraph 36.86, are the joint debts of the partnership paid out of the joint estate in the following order of priority;
c. statutory interest under section 189 on joint debts (other than postponed debts);
d. the postponed debts;
e. statutory interest under section 189 on postponed debts;
f. surplus to the (insolvent) members (possibly as an asset in their bankruptcy)
36A.121Ranking of preferential and non preferential debts
The preferential debts rank equally between themselves, and separately the debts which are neither preferential nor postponed (ordinary unsecured debts) rank equally between themselves. If there are insufficient funds to pay the preferential creditors in full, each receives the same amount in the £ [note 1]. If there are sufficient funds to pay the preferential creditors in full, and surplus funds remain, the non-preferential and non-postponed creditors each receive the same amount in the £.
36A.122 Joint estate deficiency claimed against separate estate(s)
Where the joint estate is not sufficient for the payment of all the debts, the insolvency practitioner or official receiver as liquidator (or trustee of the partnership estate in article 11 cases) should aggregate (total) the value of each different category of debt that has not been satisfied. Any shortfall which remains after part payment of the preferential and ordinary unsecured debts (referred to at paragraph 36A.120 (a) and 36A.120(b)) 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 [note 2]. The same applies to the postponed debts.
The unpaid total of each category of debt shall be a claim on each member’s estate as follows:a) where the aggregate amount of claim relates to preferential debts or debts that are neither preferential or postponed (ordinary unsecured debts) the claim shall rank equally with the ordinary unsecured debts of the member (i.e. the preferential debts of the joint estate are not accorded preferential status in the separate estates)[note 2],
b) where the aggregate amount relates to interest on the joint debts (other than postponed debts), the claim shall rank equally with the interest on the separate debts of the member [note 3],
c) where the aggregate amount relates to postponed debts, the amount shall rank equally with the postponed debts of the member [note 4],
d) where the aggregate amount relates to interest on the postponed debts, the claim shall rank equally with the interest on the postponed debts of the member [note 5].
An illustrative example of a distribution from joint and separate estates, where a winding-up order and concurrent bankruptcy orders have been made following creditors petitions under article 8 IPO94 against a partnership and two individual partners, is attached at Annex B.
When dealing with the liability of the estate of a deceased member Section 9 of the Partnership Act 1890 (PA1890) still applies to the provisions of IPO94 section 175A as regards priority of debts. This states that whilst every partner in a firm (partnership) is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner, after his death his estate is also severally liable for any unsatisfied debts for which he is jointly liable, subject to the prior payment of his separate debts [note 6].
The priority of debts in the separate estate of each member against whom an insolvency order has been made, after the payment of expenses, is the same order of priority as the joint estate. The preferential debts rank equally between themselves and separately the debts which are neither preferential nor postponed (ordinary unsecured) rank equally between themselves [note 7] (see paragraphs 36A.120 and 36A.121). The order of payment of debts in the separate estates is [note 8]:
a) Preferential debts
b) Debts which are neither preferential nor postponed debts (ordinary unsecured debts including any liquidator's claim from the joint estate)
c) Interest under sections 189 and 328(5) on all debts
d) Postponed debts (including any liquidator's claim from the joint estate)
e) Interest on the postponed debts
f) Surplus to the bankrupt or shareholders of the company.
Refer to Annex B for a worked example of how to calculate a distribution from joint and separate estates.
By virtue of section 328(6) IA86, the general law on deferred creditors is preserved, including section 3 of the Partnership Act 1890. Where a person has loaned or sold in consideration of a share of the profits of a business, Section 3 of the PA1890 makes provision for the postponement of the rights of that person in cases of insolvency. A postponed debt is usually a loan where the rate of interest varies according to the profits earned by the partnership. These postponed debts are:
i) loans to a person engaged or about to engage in business on terms that interest varies with the profits or that the lender shall receive a share of the profits [note 9], or
ii) loans advanced by a person to a buyer of goodwill in consideration of the receipt of a share of the profits [note 10].
The lender of the funds and the seller of the goodwill are treated as deferred creditors and these claims are payable after all the creditors’ claims for valuable consideration in money or money’s worth have been satisfied [note 10]. The interest on these debts is not payable in the same priority as the debt itself. Interest on the postponed debts is a separate category in the order of priority ranking after the postponed debts themselves have been paid [note 11][note 12].
Where a distribution is received from the joint estate or from the separate estate of another member of the partnership (who is subject to an insolvency order) to the separate estate of another member, that distribution shall become part of the separate estate to which it is paid, and shall be distributed in accordance with the order of priority set out in IPO94 Schedule 4, Article 8, paragraph 23, section 175B(1) [note 8][note 13].
Where a distribution is received from the separate estate of a member, to the joint estate, the distribution becomes part of the joint estate and is distributed in the order of priority as set out in IPO94 Schedule 4, Article 8, paragraph 23, section 175A(2)[note 14][note 15].
36A.127Interest on debts
(amended June 2010)
(a) Statutory interest
Any surplus left after payment of the debts that are neither preferential nor postponed, should then be used to pay interest on the debts outstanding since the winding-up order was made 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) [note 16].
The rate of interest payable is whichever is the greater of;
i) The rate specified in s17 of the Judgments Act 1838(JA1838) on the day the order was made (currently this stands at 8%);and
ii) The rate applicable to that debt apart from the winding up or bankruptcy (contractual interest) [note 16].
Interest on preferential debts ranks equally with interest on other debts which are neither preferential nor postponed debts (ordinary unsecured debts) [note 17]. Interest should be calculated on a simple basis.
(b) Interest due on debts for periods up to the date of the insolvency order (winding-up order against the partnership or bankruptcy order(s) against an individual member or members)
In certain circumstances creditors may include interest accumulated on their debt for periods prior to the insolvency order, even where this has not previously been reserved or agreed [note 18][note 18a]]. If a debt is due by written instrument and payable at a certain time, interest may be claimed for the period from that specified time to the date of the bankruptcy order [note 19][note 19a]. If the debt is due otherwise, interest may only be claimed if, prior to the presentation of the petition a written demand for payment was made by or on behalf of the creditor, giving notice that interest would be payable from the date of the demand to the date of payment [note 20][note 20a]. Interest claimed in this way can only be claimed for the period between the date of the demand and the date of the bankruptcy order [note 21][note 2a]. The maximum rate of interest to be claimed is the rate specified in section 17 of the JA1838 on the date of the bankruptcy order, as detailed at sub paragraph (i) above [note 20][note 23].
Where a surplus exists on the joint estate, the insolvency practitioner shall adjust the rights among themselves of the members of the partnership as contributories and shall distribute any surplus to the members or, where applicable, to the separate estates of the members, according to their respective rights and interests in it [note 24].
a) Separate accounts must be kept for the joint estate of the partnership and of the separate estate of each member of that partnership against whom an insolvency order is made [note 25].
b) No member of the partnership shall 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[note 26].
c) For the purpose of establishing the value of any debt where the joint estate is insufficient to pay the joint preferential debts, the joint ordinary unsecured debts or the joint postponed debts, the value of the aggregated claim may be estimated by the responsible insolvency practitioner in accordance with section 322 (where a trustee is able to estimate the value of a debt subject to a contingency or which does not bear a certain value)or (as the case may be) in accordance with the rules [note 27].
d) Sections 175A and 175B are without prejudice to any provision in the IPO94 or of any other enactment concerning the ranking between themselves of postponed debts and interest thereon but in the absence of any such provision, postponed debts and interest thereon rank equally between themselves[note 28]. The interest on postponed debts is a separate category of debt , ranking after the postponed debts have been paid [note 11][note 12].
e) Where any two or more members of a partnership constitute a separate (sub) partnership, the creditors of this separate partnership will be a separate set of creditors and subject to the same statutory provisions as the separate creditors of any member of the insolvent partnership. Any surplus in the separate partnership will be distributed to the members or the separate estates of the members of that partnership according to their respective rights and interests in it [note 29].
f) The official receiver, the Secretary of State or a responsible insolvency practitioner are not entitled to remuneration for their services in connection with:
i) the transfer of a surplus from the joint estate to a separate estate,
ii) a distribution from a separate estate to a joint estate, or
iii) a distribution from the estate of a separate partnership to the separate estates of the members of that partnership [note 30].
36A.130Winding up of insolvent partnership on members’ petition where concurrent petitions are presented against all members
The provisions of IPO94 Schedule 4, Part II described at paragraphs 36A.120 to 36A.129 are also applied in the case of a winding up of an insolvent partnership on a member’s petition where concurrent petitions are presented against all the members [note 31].
IPO94 Schedule 7 Article 11 paragraph (2) provides that Part IX (other than sections 273, 274 and 287) and Parts X to XIX of the IA86 are to apply. As a result IA86 section 328 applies (concerning the priority of expenses and debts) which is modified in IPO94 schedule 7. This provides for the administration of the partnership assets in the same manner as scheduled under IPO94 Schedule 4 article 8 in relation to the winding up of an insolvent partnership on a creditor’s petition, where concurrent petitions are presented against one or more members of the partnership, as outlined in paragraphs 36A.120 to 36A.129.