PART 7
PRACTICAL ISSUES
December 2011
Apart from some specific practical issues dealt with in this Part of the chapter. guidance and information relating to partnerships is contained elsewhere in the Technical Manual, as follows:
Antecedent recoveries – Chapter 31.4A, paragraph 31.4A.22
Assets from failed PVA – Chapter 31.10, paragraph 31.10.135
Charging orders – Chapter 9, paragraph 9.106
Dealing with professional partnerships – Chapter 59
Distributions – Chapter 36A, Part 7
Estate Accounting – Chapter 36, Part 5
Execution – Chapter 9, paragraph 9.85
Exempt property – Chapter 30, paragraph 30.22
Inspections – Chapter 8, paragraph 8.56
Meetings – Chapter 16, Part 10
Private examinations – Chapter 23, paragraph 23.11 and 23.12
Public examinations – Chapter 14, paragraph 14.4
Reports to creditors – Chapter 18, paragraphs 18.17 and 18.18
Sanction – Chapter 29
Secretary of State appointments – Chapter 17, paragraph 17.68
Statement of affairs – Chapter 12, Part 8
Taxation – Chapter 77, Part 6
53.122 Where bankruptcy orders made against partners with no concurrent order against partnership
Where bankruptcy orders have been made against all members of a partnership but no order has been made against the partnership (as opposed to a joint bankruptcy petition – see paragraph 53.100E - which includes an order to wind-up the partnership) there could be difficulties in dealing with the administration of the estate as, although the partnership will have been dissolved (see paragraph 53.88), there will be no ‘solvent’ partner to deal with the winding up of the partnership (see paragraph 53.144).
The official receiver as trustee will not be able to deal with the partnership property. The legal position is that partnership property effectively forms a trust in favour of the partnership creditors and thus does not form part of a bankrupt’s estate capable of vesting in a trustee. The official receiver has no powers, save for the restrictions placed upon an undischarged bankrupt (see Chapter 25), to prevent the bankrupts from trading although they will be obliged to account to the liquidator for any profits generated from the use of partnership assets.
See paragraph 53.152 for advice on dealing with this circumstance.
53.123 Where official receiver deals with partnership property and there is no winding-up order
Where no winding up order has been made against the partnership and the official receiver has mistakenly dealt with partnership property, he/she may follow the advice in paragraph 53.154 and make an application to court for an order that the partnership assets be administered as if the individual members had presented a joint bankruptcy petition [note 1]. The official receiver should additionally seek the directions of the court as regards the property already dealt with. Ideally, the official receiver should seek an order that the court validates the realisation/removal of the property and that the costs of dealing with the property can be applied as expenses of the estate as if the property had been dealt with when the winding-up order was in place.
Any property in the possession of the official receiver or his/her agents should be held pending these directions. Where the property is perishable in nature, or if the official receiver is incurring onerous storage charges, he/she should consider consulting with the partners with a view to seeking their agreement for the sale of the goods. If agreement cannot be reached, the matter should be referred to Technical Section.
53.124 Consolidation (amended April 2014)
Consolidation is where related insolvency cases are joined together in one case, following an application to court. So far as partnerships are concerned, this is usually carried out where different elements of the partnership are subject to insolvency orders at different times (such as in the circumstances described in paragraph 53.122).
Consolidation on its own is not sufficient to allow the official receiver to deal with property of the partnership and, instead, the process at paragraph 53.154 should be followed.
53.125 Notification to Land Charges Department
Any consolidation order made by the court should be notified to the Land Charges Department, following the guidance in paragraph 50.39.
53.126 Where order made under wrong article
Where an order is made under the wrong article of the legislation [note 2] (for example, where an order is made under article 10 when not all the partners were subject to concurrent petitions – see paragraph 53.100E), the correct approach would be for the official receiver to apply to the court to seek a review and possible rescission of the order(s).
53.127 Insolvency orders made at different times
Where insolvency orders are made at different times (under articles 8 or 10 - see paragraphs 53.100B and 53.100D), the insolvency practitioner appointed in the earliest case must be appointed in each subsequently made insolvency order [note 3] [note 4].
Also, where the Secretary of State has appointed an insolvency practitioner as trustee in a case where a creditor has presented concurrent petitions (see paragraph 53.100B) [note 5] then the practitioner will be appointed for any member against whom an order is subsequently made [note 6]. See paragraph 53.128 for potential difficulties in this regard.
53.128 Difficulty in the appointment of insolvency practitioners in certain partnership cases
Generally speaking, in partnership cases, insolvency practitioners may be appointed in the usual manner (see Chapters 16 and 17).
Where a winding-up order is made against a partnership on the petition that it be wound-up with concurrent petitions against the members (see paragraph 53.100B), it will not be possible to seek the appointment of a insolvency practitioner via the Secretary of State route (see Chapter 17, Part 5) unless an order has also been made against at least one of the partners [note 7]. If the petitions against the partners are not proceeded with within 28 days of the making of the order against the partnership, the winding up will proceed as if it was on the petition against the partnership solely, and a Secretary of State appointment will then be possible.
The problem in this will come where the official receiver is dealing with a partnership where continued trading is viable (see Chapter 53.62) and where the appointment of an insolvency practitioner would normally be sought. In such a case, the advice of Technical Section should be sought as to how matters might be progressed (by the appointment of a special manager, for example – see Chapter 32.4).
53.129 Where annulment obtained in a joint petition
In the extremely unlikely event that one partner in a joint bankruptcy order under article 11 (see paragraph 53.100E) sought and obtained an annulment of his/her bankruptcy the official receiver should make application to court for an amendment of the title of proceedings (see paragraph 4.19) to remove the name and description of the ‘solvent’ partner from the description. This is only likely to occur where the partner pays his/her personal debts, and any partnership debts, in full.
53.130 Naming a partnership in the full description
Whilst there will be undoubted concern about reputational damage to a solvent partnership named in the full description of the individual bankruptcy of a partner, the legislation does not provide any alterative [note 8] [note 9] in that it is a requirement that the full description contains the name under which the debtor carries on business.
Where a bankrupt was formerly a partner in a business that is continuing to trade, urgent consideration should be given to applying to the court to vary a winding-up order or bankruptcy order description where the description suggests that the business is subject to the order as such publicity could adversely affect the continuing business. Such action should, ideally, be carried out prior to gazetting or advertising the making of the order,
Specifically, the description should state that the bankrupt ‘formerly traded in partnership with others as…..’.
An early application for variation of the description along these lines will protect the official receiver from a claim for damages in respect of adverse publicity.
Except in the case of limited partnerships (see paragraph 53.132) or corporate members of a partnership (see paragraph 53.28), the Registrar of Companies has no role to play as regards partnerships so any reference in the legislation to the Registrar (for example, a requirement to serve notice) can be ignored [note 10].
53.132 Serving notice on the Registrar of Companies where winding up order made against limited partnership
The legislation does not require the official receiver to serve a copy of the winding up order made against a limited partnership (see Part 2) on the Register of Companies (as is required in the case of a company – see paragraph 3.18) . In fact, the Registrar has indicated that service of the order would not be accepted – partly, it would seem, because the internal rules of the Registrar do not provide a mechanism for the registration of court orders on the file of a limited partnership.
In the interests of recording accurate information regarding limited partnerships on the register of companies, the Registrar has agreed to accept service of a notice of a winding-up order being made against a limited partnership. Such notification should be on form LR6 (http://www.companieshouse.gov.uk/forms/llp/LP6.pdf). Details of the winding-up of the partnership should be entered into section ‘e’ of the form.
53.133 Where there is doubt over membership
It may be the case that there is doubt over who is a partner of a partnership. This may be particularly relevant where the official receiver is dealing with a bankruptcy of a person who may be a partner (and whose interest in the partnership will be an asset in the proceedings – see paragraph 53.144) or where the official receiver is dealing with the winding up of a partnership and is seeking contributions from the partners (see paragraph 53.143).
In deciding whether a person is a partner, the official receiver will need to consider the actions of the person and, particularly, the actions of the person against the definition of a partnership in Part 1. Indications of the members of a partnership may be found in the partnership agreement or in headed notepaper, or similar. It is likely to be the case that there is no list kept of partners joining or leaving and it will often be a case of considering the actions of those involved to establish if and when individuals were partners.
53.134 Principle for estate accounting and distributions
Estate accounting for partnerships is dealt with in detail in Chapter 36, Part 5, and distributions are dealt with in Chapter 36A, Part 7, but a very brief summary is that joint creditors are paid out of the joint (partnership) estate, and separate creditors paid out of the separate estates. If there is surplus on the joint estate then those monies may be applied to the separate estate(s).
If, on the other hand, the joint estate is not sufficient for the payment of the joint debts, the official receiver, as liquidator, shall aggregate the value of the debts which remain unsatisfied and that aggregate amount shall be a claim against the separate estate of each partner against whom an insolvency order has been made – ranking equally with his/her own creditors. In short, any shortfall on the joint estate is treated as just another creditor on the individual’s estate [note 11].
53.134a Partnership debts – joint debts (added April 2014)
The legislation defines a joint debt as a debt of an insolvent partnership, in respect of which an order (see paragraph 53.100) is made [note 11a].
Contractual debts tend to be joint debts, which are the joint responsibility of the members of the partnership. The terms of the contract and/or the partnership agreement may need to be reviewed for the possible agreement of members to several responsibility for partnership debts, in addition to their joint liability. A deceased member’s estate is jointly and severally liable for the partnership debts, in so far as they remain unsatisfied by the joint estate, but subject to the prior payment of his/her separate debts [note 11b].
53.134b Partnership debts – separate debts (added March 2014)
The legislation defines a separate debt as one for which a member of the partnership is liable, other than a joint debt (see paragraph 53.134a) [note 11c]. Generally, these are the private debts of a member, not incurred directly in relation to the trading activities of the partnership.
Estate expenses are paid in priority to the debts, but on the principle that joint expenses are paid out of the joint (partnership) estate, and separate expenses paid out of the separate estates. If there is surplus on the joint estate then those monies may be applied to the separate estate(s). (see Chapter 36, Part 5).
53.136 Position of employees of partnership following insolvency
As outlined in paragraph 53.21 a partnership cannot employ people. The proper employers are the partners. The effect of this is that a winding-up order made solely against the partnership (with no order(s) against the partners) would not trigger the provisions that allow employees of an insolvent business to claim monies from the national insurance fund [note 12] [note 13] (see Chapter 3 of the RPS Manual).
Where the official receiver is dealing with employees in these circumstances (for example, during a trading inspection – see paragraph 8.67), he/she may not dismiss the employees and should not hand them the RPS claim forms. The employees may still pursue the partners personally for outstanding wages (including petitioning for their bankruptcy).
Where the official receiver is dealing with the insolvency of the partnership and any of the partners, he/she may deal with the employees in the usual way.
53.137 Bankruptcy order against partner - contact with partnership creditors - no order against partnership
As partners are jointly and severally liable for partnership debts, the official receiver should send out a report to creditors and notice of a meeting or notice of no meeting to all the partnership creditors. Where the official receiver is satisfied that the partnership creditors will be paid by the new partnership/the solvent partners, he should consider applying to the court [note 14] under rule 6.77 to relieve him of the requirement to report to the creditors.
53.138 Bankruptcy order against only general partner of a limited partnership with assets
A limited partnership (see Part 2) by its very nature cannot continue in the absence of a general partner (see paragraph 53.40) and on the bankruptcy of its only general partner it is determined. Where the partnership is insolvent and there are assets to be dealt with, the official receiver should consider applying to the court [note 15] for the court to make an order regarding the administration of the limited partnership’s estate. Notice of the application should be served on any limited partner with a short covering letter explaining that the purpose of the application is to regularise the administration of the insolvent partnership estate. Putting the limited partner on notice will give him the opportunity to step in and make an application to the court [note 16] for the court to consider whether the limited partner should deal with the partnership estate.
53.139 Trustee/ liquidator’s right of access to records of solvent partnership
The trustee or liquidator of a partner has no right to retain the records of a solvent partnership of which the insolvent is/was a member. However, the official receiver, as trustee or liquidator, should require the solvent partner/s to provide him/her with proper accounts of the partnership trading and permit inspection of the records [note 17].
Access to the records will be necessary to establish the financial position of the partnership and for considering the bankrupt’s share of any value of the partnership, for example to verify that a fair price is being offered for the insolvent’s interest in the partnership (see paragraph 53.144). Where the solvent partner/s refuse to permit the trustee/liquidator access to the partnership records, application may be made for the solvent partner/s to be summoned before the court and ordered to produce the records (see Chapter 23 generally regarding private examinations).
[Back to Part 6 – The insolvency of partnerships] [On to Part 8 – Realisation of assets in relation to partnerships]