DISSOLUTION OF A PARTNERSHIP
The dissolution of a partnership is the process during which the affairs of the partnership are wound up (where the ongoing nature of the partnership relation terminates). This should not be confused with the term dissolution when applied to a limited company, which is the event that marks the conclusion of the winding-up.
A technical dissolution takes place each time there is a change in the composition of the firm – i.e., technically, the partnership is dissolved each time one partner leaves (and is replaced by another), or a new partner joins [note 1]. In such a case there will usually be no break in the business of the partnership with the ‘new’ firm generally taking on the assets and liabilities of the ‘old’.
A general dissolution is the full dissolution of the partnership – following, for example, the cessation of trade, the bankruptcy or death of a partner or by agreement – see paragraph 53.83. The general dissolution involves the winding-up of the partnership and the taking of and settling of accounts (see paragraph 53.146).
The general dissolution of a partnership will usually be instigated as a result one of the following events:
Where the partnership is dissolved following an application to the court the effective date of dissolution is the date of the judgment for dissolution [note 11].
If the dissolution was by notice of a partner, then the partnership is dissolved as from the date specified in the notice [note 12].
Where a partnership is subject to general (rather than ‘technical’) dissolution (see paragraph 53.80), it will be unable to conduct new business (unless the partnership agreement says otherwise), but the partners will have the authority to manage the business for the purposes of winding-up its affairs [note 13] [note 14].
A dissolution will not, of itself, discharge any partner from a debt incurred prior to dissolution, unless he/she can show that the creditor has discharged him/her from the debt or accepted a substitute debtor [note 15].
A general dissolution will terminate the contracts of employment of all the partnership employees.
The legislation provides that the bankruptcy of a partner shall cause the partnership to dissolve unless the partnership agreement provides otherwise [note 16].
The date of dissolution would be the date of the making of the bankruptcy order [note 17].
The official receiver, as trustee of the bankruptcy estate, has no authority to step into the shoes of the bankrupt partner and, for example, deal with the dissolution of the partnership [note 18]. The official receiver’s interest (as trustee) in the partnership is limited to the share in the partnership after the accounts have been settled, which is dealt with by the solvent partner(s) (see paragraph 53.146).
Where one of the ‘triggers’ outlined in paragraph 53.83 have occurred it is possible that the partnership will already have been dissolved prior to the date of a bankruptcy order against the insolvent partner. In practical terms, this does not affect how the official receiver should deal with the partnership, in that he/she should seek to claim the bankrupt partner’s share in the partnership (see paragraph 53.144).
See paragraph 53.152 for guidance where all members are subject to bankruptcy orders.
Where a corporate partner (see paragraph 53.28) is wound-up it is unlikely that this would cause the dissolution of the partnership (as the bankruptcy of a partner would). It is unlikely that the partner (acting through the liquidator) would be willing or able to continue to perform the functions of a partner and there would be a need to prevent the corporate partner from being exposed to further liability for partnership debts.
The official receiver should first look to resign from the partnership, which will in any event trigger the dissolution the partnership.
Alternatively the liquidation of a corporate partner may lead to an application for the partnership to be wound-up on the grounds that it is just and equitable to do so (see paragraph 53.104) [note 19].
See paragraph 53.149 for advice on dealing with an insolvent corporate member’s share in a partnership.
Partnership agreements (see Part 3) sometimes contain clauses that, where a partnership is dissolved, a surviving (solvent, in this context) partner may purchase the bankrupt’s partner’s share at a pre-arranged price. Where this is considered to be a fraud upon the bankruptcy creditors, the court may order the sale of partnership assets to ensure that the creditors are not disadvantaged [note 20]. Such a challenge would constitute an antecedent recovery and the advice in Chapter 31.4B may be followed.
It is open to the (ex)partners of a dissolved partnership to continue the business of the partnership, even using the ‘original’ name, providing he/she does not hold out that the other partners are still partners with him/her. In such a case, the official receiver should satisfy him/herself that the new business is not using assets that formed part of the partnership property or, if such assets are being used, that they were accounted for when calculating the bankrupt’s share in the dissolution of the partnership (see paragraph 53.146).
Where one partner leaves and the partnership is dissolved (either through choice or by, for example death or bankruptcy), the departing partner’s interest in the assets of the partnership and any undrawn profits must be valued by the continuing partners (see paragraph 53.145). Where the business is continued without any financial settlement, the departing partner is entitled to such share of the profits as the court may find attributable to his/her share of the partnership assets or, alternatively, 5% per annum on the amount of his/her share [note 21].