Partnership Liquidation

What is Partnership Liquidation

Partnership liquidation is a procedure used to wind up a partnership, as an unregistered company.  In many ways, it is identical to the company liquidation process, where a petition is presented to the court to place the partnership into liquidation. A partnership can only be wound up as an unregistered company if:-

• the partnership is dissolved, or ceases to trade
• if the partnership is unable to pay its debts;
• if a court feels it is just and equitable to wind it up.

Once a petition has been presented, a hearing date will be set by the court.  At the hearing, if an order is made for winding up, the Official Receiver will be appointed to act as liquidator, and deal with the Partnership’s affairs accordingly.

What about the Partners of an insolvent Partnership?

Quite often the liquidation procedure will be used together with other insolvency proceedings.  This is because if there are insufficient funds to settle the Partnership debts in the liquidation, the partnership debts can be enforced against the partners individually. Therefore, it is important to assess the position regarding the partnership’s assets and liabilities. In the first instance, partnership assets are applied against discharging its liabilities.  Any shortfall that arises will then transfer to the personal estates of the partners. If the partners’ agree that the partnership is insolvent, they should consider all options available, which includes Interlocking Individual Voluntary Arrangements. Where this alternative is not appropriate, it is possible for all of the partners to petition collectively for their bankruptcies, or alternatively, for one partner to petition separately for their own bankruptcy.

What are the options for Creditors’ of an Insolvent Partnership?

There are three ways in which a partnership can be wound up:-

1. apply to wind up the partnership business only

1. apply to wind up the partnership business and at the same time present a bankruptcy petition against one (or more) of the partners

1. present a bankruptcy petition against one (or more) or the partners only.

The most appropriate option will depend on the position regarding the partnership’s assets and liabilities, and the realistic prospect of recovery in each of the individual estates.

Benefits and Risks of Partnership Liquidation

Benefits  In contrast to Creditors’ Voluntary Liquidation, there are few benefits to winding-up a partnership.  It can be an expensive process, depending on the structure of the partnership, the number of members, and the assets to be dealt with. However, the process can be useful where a creditor, or partner, would like partnership assets to be applied against its debts.  In order for this strategy to result in a successful outcome, the partnership will need to have sufficient assets to meet its liabilities.  If the realisable value of assets is insufficient, then the partners themselves will be liable for any shortfall. Risks The primary risk for creditors’ or members’ is that the partnership may have insufficient assets that can be realised to pay its liabilities, together with the costs and expenses of the winding-up. Where this is applicable, the individual partners’ will be jointly and severally liable for any shortfall, but there is no guarantee that they can meet this shortfall.  There are better, more workable, solutions for an insolvent partnership, such as a Partnership Voluntary Arrangement, or Interlocking Individual Voluntary Arrangements. Careful consideration must be given to all options available to a financially distressed business.  For more advice, fill out our Contact Form and we will be in touch.

Who can present a petition for winding up?

A petition for the winding up of a partnership as an unregistered company can be presented by:-

• A creditor (owed £750 or more)
• A partner

Alternatively, where a bankruptcy order is made against one (or more) partners, but no winding up order is made against the partnership itself, an application can be made either by the Official Receiver, an Insolvency Practitioner or Trustee of any interested person, for an order that the partnership is to be wound up. Practically, the only reason to make an application for consolidation of proceedings would be to deal with any partnership assets, which would otherwise fall outside the Official Receiver’s control.

How is the appointment made?

Where a partnership is wound up, the Official Receiver will be appointed as Liquidator.  Similarly, when one (or more) or the partners are made bankrupt, the Official Receiver will be appointed as Trustee, although it is possible that a licensed Insolvency Practitioner would later be appointed to deal with the insolvent estates.

What is the effect of liquidation?

The partnership is treated as an unregistered company and is therefore wound up in a similar manner to a company.  The Liquidator will deal with the assets and liabilities of the partnership itself and has a number of duties, as follows:-

• To realise the assets of the partnership, and any deficiency due on individual capital accounts
• To take possession of the books and records of the partnership
• To deal with creditors and agree their claims
• To make a distribution to creditors in order of priority

Where the partnership estate is insufficient to meet certain (preferential) liabilities, the unpaid balance of those debts will be apportioned equally between the individual estates of the members, and it will be for the Liquidator to lodge claims in these estates as appropriate.

What happens if there is a deficiency in the Partnership estate?

If the partnership assets are insufficient to settle all of its liabilities, then the shortfall must be met by the individual partners themselves, subject to the terms of any partnership agreement.  The partners should consider how to protect their personal position and deal with the deficiency. The partners’ may be in a position where they can fund the shortfall out of their personal funds.  If this is not the case, the partners’ will need to consider other options which include (but are not limited to):-

• Individual Voluntary Arrangements
• Debt Management
• Debt Consolidation
• Bankruptcy

The various options must be carefully considered, and the most appropriate solution will depend on the position of each individual partner.  Any action taken by one partner can affect those remaining – for example, if one partner is made bankrupt, and there is little or no value in the individual estate, the remaining partners will be liable for the bankrupt partner’s share.