PART 6
December 2011
THE INSOLVENCY OF PARTNERSHIPS AND PARTNERS
Prior to 1986 insolvent partnerships were dealt with as bankruptcies of the individual partners under the Bankruptcy Act 1914, apart from partnerships with eight or more members, which could have been wound up as unregistered companies under the Companies Act in force at the time.
In 1986, through a power given in the Act [note 1], the Insolvent Partnerships Order 1986 came into force. This Order was repealed in 1994 and, with effect from 1 December 1994, replaced by the Insolvent Partnerships Order 1994 – this being the current legislative tool for dealing with insolvent partnerships. The significant legislative departure from the pre-1986 position in these Orders is that partnerships are now dealt with under the corporate provisions of the insolvency legislation.
53.96 Application of Insolvent Partnerships Order 1994
The Insolvent Partnerships Order 1994 operates to apply provisions of the Insolvency Act 1986 and the CDDA 1986, with appropriate amendment set out in the schedules to the Order, to partnerships (including limited partnerships – see Part 2).
Where a winding up order or bankruptcy order was made after 1 December 1994 the current legislation [note 2] will apply and the information in this Part may be followed. In the extremely unlikely event that the official receiver is dealing with a case where the order was made before 1 December 1994 the advice of Technical Section should be sought where there is a matter of doubt. The provisions of the Insolvent Partnerships Order 1986 have marked differences to the current legislation.
Secondary insolvency legislation (such as the Rules) are applied to insolvent partnerships [note 3]. The application of the Rules and other secondary legislation is ‘with the necessary modification’. The necessary modifications are not set out in the legislation and the official receiver will have to use his/her best judgement (with any required guidance from Technical Section) as to how the rules might apply in particular circumstances.
53.99 The legislation does not apply to LLPs
As outlined in paragraph 53.1, this chapter does not cover LLPs. From the point of view of the application of insolvency legislation, LLPs are dealt with as a version of a limited company, rather than as a partnership and, therefore, the legislation applying to other types of partnership [note 4] does not apply to them. Information and guidance on LLPs can be found in Chapter 53A.
53.100 Routes by which partnership may be dealt with under the legislation
There are five routes (not including partnership voluntary arrangements – see paragraph 53.118 - or administration orders - see paragraph 53.119) by which a partnership may be dealt with under the insolvency legislation:
|
|
Legislative reference (IPO 1994) |
Route |
Also known as |
Number of cases/ orders |
Paragraph containing any relevant advice |
|
Article 7 [note 5] |
Winding up of the partnership as an unregistered company on a creditor’s (or other third party – including an insolvency practitioner) petition with no concurrent petition against partners
|
Form 3 |
1 |
||
|
Article 8 [note 6] |
Winding up of the partnership as an unregistered company on a creditor’s petition with concurrent petitions against one or more partners
|
Form 5 |
2 or more |
||
|
Article 9 [note 7] |
Winding up the of the partnership on the petition of a partner where no concurrent petition presented against partners
|
|
1 |
||
|
Article 10 [note 8] |
Winding up of the partnership as an unregistered company on the petition of a partner, with concurrent petitions against all the partners
|
Form 11 |
3 or more |
||
|
Article 11 [note 9] |
Joint bankruptcy petitions by all the individual partners, but with no petition against the partnership (court order will include order winding up business of partnership)
|
Form 14/Form 16 |
1 (with 3 or more parts) |
53.101 Winding up of the partnership as an unregistered company under article 7
A partnership is wound up as an unregistered company [note 10] [note 11] and it will, to all intents and purposes, be dealt with as a company for the purposes of its liquidation (this is despite the general principle that a partnership has no separate legal identity – see paragraph 53.19).
Most of the provisions of the Act will, therefore, apply with necessary amendments as provided by the legislation [note 12]. Similarly, the Rules will apply with necessary modification.
The modifications are largely administrative to allow the Act or Rules to be applied to partnerships. Matters of particular note are covered in the following paragraphs and, also, in Part 7 which deals with practical issues.
Guidance on unregistered companies is available in Chapter 58
53.102 Orders made under article 7 – recovery from partners
Where a winding-up order is made against a partnership as an unregistered company on a creditor’s (or other third party – including an insolvency practitioner) petition with no concurrent petition against partners [note 13] (see Chapter 45 Part 14A) the (former) partners become contributories with unlimited liability for any deficiency in the liquidation.
The official receiver should take steps to seek recovery of the debt due to the partnership from the partners (see paragraph 53.143).
53.103 Individual orders not made under article 8
If a creditor presents petitions for the winding-up of the partnership and concurrent petitions against one or more of the members [note 14] but the court does not make bankruptcy orders against the partners within 28 days of the winding-up order matters will proceed as if the petition had been presented for the winding up of the partnership as an unregistered company on a creditor’s (or other third party’s – including an insolvency practitioner’s) petition with no concurrent petition against partners, that is under article 7 [note 15].
The net effect of this will be much the same as the partners will still have unlimited liability to contribute to the debts of the partnership when the official receiver, as liquidator, makes a call on contributories (see paragraph 53.143).
The official receiver should administer the winding-up of the partnership in the usual way but note that he/she is unable to seek the appointment of an insolvency practitioner until the 28 days have expired (see paragraph 53.128).
If the bankruptcy order(s) is made, but not the winding-up order, then the bankruptcy will proceed essentially as a ‘normal’ bankruptcy [note 16].
A member of a partnership with eight or more members or, with the leave of the court, a partner of any partnership, can apply to the court for the partnership to be wound up – without concurrent petitions against the partners. Generally, the partnership is wound up as an unregistered company under Part V of the Act, with the same modifications made for cases under article 7 (see paragraph 53.101) [note 17] [note 18].
The partners would be liable to contribute to the debts of the partnership (see paragraph 53.143).
53.105 Practical difference between articles 10 and 11
On the face of it, there may appear to be very little difference in the practical effect between articles 10 and 11 (see paragraph 53.100).
The main difference between those articles is that article 10 provides for the winding up of a corporate partner of a partnership, whereas article 11 might only be utilised where all partners are individuals.
53.106 Application of article 10 where impracticable to petition against all partners
The legislation [note 19] provides that a petition to wind up a partnership by a partner with at least one accompanying bankruptcy petition against a partner shall be accompanied by petitions for the bankruptcy of all the other partners.
Where this is impracticable (in a case where, for example, it is not possible to trace one of the partners), the court may direct that the petitions be presented against the partnership and such partner or partners of it as are specified by the court [note 20].
53.107 Application of article 11 where impracticable to petition against all partners
The legislation [note 21] provides that all the partners are required to bring a joint petition for their winding up, which will include an order for the winding-up of the partnership business.
Where this is impracticable (in a case where, for example, it is not possible to trace one of the members), the court may direct that the petitions be presented by such member or members of it as are specified by the court [note 22].
The jurisdiction requirements for the winding-up of a partnership are largely the same as for a company (see Chapter 45, Part 2) except that where a partnership has more than one place of business (which is a deciding factor in the absence of a registered office) the petition may be served in the court covering the locality of the place of business where the debt was incurred, even if that is not the primary place of business [note 23].
53.109 Grounds for winding-up a partnership
The grounds for winding-up a partnership are largely the same as for an unregistered company (i.e., that the partnership has ceased to carry on business, is unable to pay its debts, the winding-up is just and equitable or to exit administration [note 24] [note 25]).
In deciding whether a partnership is unable to pay its debts the court will only consider the position of the partnership (i.e., the partnership assets and the partnership liabilities) and not the ability of the partners to personally deal with partnership debts from their separate estates [note 26]. This is unless the petition is presented by an insolvency practitioner and an insolvency order has already been made against a partner – in which case the making of the order against the partner is proof that the partnership is unable to pay its debts, unless proved otherwise [note 27].
53.110 Power to wind up partnership where winding up order or bankruptcy order made against partner
At any time after a petition has been presented for the winding-up or (more commonly) the bankruptcy of a partner, and the attention of the court is drawn to the fact that that person is a partner of an insolvent partnership, the court may make an order as to the future conduct of the proceedings [note 28] [note 29]. Such an order is likely to bring the proceedings under one of the articles of the legislation [note 30] (see paragraph 53.100).
53.111 Court has power to wind-up partnership despite no petition
The court has jurisdiction to wind up a partnership of its own motion despite the absence of a petitioning creditor. Such jurisdiction is likely to be exercised only in exceptional circumstances such as where there is concern over the security of customer deposits [note 31].
53.112 Creditors may petition against partner only
Partnership creditors may seek a bankruptcy order against one or more of the partner(s) of an insolvent partnership without including other members and without petitioning for the winding-up of the partnership [note 32] [note 33]. Any subsequent liquidator of the partnership would then have power to prove in those bankruptcy proceedings (see paragraph 53.117) [note 34] [note 35].
See paragraph 53.144 for advice where bankruptcy order made against a partner.
53.113 Official receiver to act as trustee where concurrent petitions presented
Where bankruptcy orders are made on a joint petition under Article 11 (see paragraph 53.100E), the official receiver will be appointed trustee (rather than receiver and manager) on the making of the order [note 36].
If the official receiver intends to seek the appointment of an insolvency practitioner as trustee in his/her place he/she should limit realisation of assets to those realisations necessary to protect the estate (see paragraph 24.7).
53.114 ‘Officers’ of the partnership
Any person who has acted as a partner in the management or in control of a partnership may be considered to be an ‘officer’ of the partnership (and, as with the position of a de-facto director in a company, such an individual might not, necessarily, have been a partner) [note 37].
53.115 Claims against the partners
Where a winding-up order has been made against a partnership no actions or proceedings can be commenced or continued against the members of an insolvent partnership in respect of any debt of the insolvent partnership except by leave of the court [note 38]. The effect of this provision would create a moratorium for the partners against partnership debts, although they are instead liable as contributories for the deficiency in the liquidation.
Such a moratorium would not be effective if the partnership is in a PVA or administration.
53.116 Liability of partners to disqualification or criminal sanction
As partnerships are wound up as companies (see paragraph 53.95) and the partners are considered to be officers (see paragraph 53.114), the partners are liable to actions for disqualification [note 39] and criminal sanctions for fraudulent trading [note 40]. Detailed discussion of the provisions relating to disqualification and fraudulent trading is outside the scope of this Manual and instead reference should be made to Chapters 75 and 53, respectively, of the Enforcement Investigation Guide.
53.117 Powers of the official receiver as liquidator of the partnership
For cases made under articles 9, 10 and 11 (see paragraphs 53.100C-E)The powers of the official receiver as liquidator of a partnership are the same as his/her powers as liquidator of a company (with appropriate modification) (see Chapter 29, Part 2) and his/her powers as trustee of the bankruptcy estates are the same as for a ‘normal’ bankruptcy (see Chapter 29, Part 3). For cases made under articles 7 and 8 (see paragraphs 97A-B), the official receiver’s powers as liquidator are as detailed in Annex 3 to Chapter 29. His/ her powers as trustee in a case made under one of those two articles are as detailed in Chapter 29, Part 3. [note 41] [note 42].
53.118 Partnership voluntary arrangements
It is possible to propose a partnership voluntary arrangement (PVA) [note 43]. Such an arrangement would operate in much the same way as an IVA or CVA in that the partnership comes to a legally binding arrangement, through a nominee, with its creditors. The partners may propose the arrangement, unless an administration order (see paragraph 53.119) is in force, where the partnership is being wound-up (see paragraph 53.100A-D), or where an order has been made on a joint bankruptcy petition (see paragraph 53.100E).
In many cases, a PVA will only be approved by creditors if the members also enter into interlocking IVAs or CVAs.
See Chapter 20, Part 3 for more information on PVAs.
53.119 Partnership administration orders
Any partnership which the courts in England and Wales have jurisdiction to wind-up may apply to those courts for an administration order (see Chapter 56, Part 1 for information on administration orders generally). The legislation provides that the Act [note 44] is applied in modified form [note 45] [note 46] as are other parts of the Act [note 47].
53.120 Voluntary liquidation not available
Voluntary ‘liquidation’ of a partnership is not available [note 48] unless to exit administration (see paragraph 53.119) [note 49].
[Back to Part 5 – The dissolution of a partnership] [On to Part 7 – Practical issues relating to the administration of insolvent partnerships]