Insolvency
| Author | Elspeth Berry |
| Pages | 157-190 |
Chapter 12 Insolvency
12.1 INTRODUCTION
12.1.1 General and limited partnerships
The scheme of the legislation
The Partnership Act envisages that a loss-making partnership will be dissolved, either with or without the intervention of the court, and then wound up (see Chapter 11). However, in addition to this, the IPO applies with modifications certain of the IA 1986 procedures available to companies (and LLPs (see 12.1.2)); partnership voluntary arrangements (PVAs), administration orders, and winding up as an unregistered company either with, or without, the presenting of concurrent insolvency petitions against partners. The IPO also provides for the making of a joint bankruptcy petition against all the partners. The relevant forms for applications, petitions and notices are provided at Sch 9 to the IPO.
A number of criticisms may be made of the IPO. Firstly, it attempts to apply a statute largely aimed at corporate structures to partnerships. Although it defines the terms ‘members’, ‘officers’ and ‘shares’ (see below), and states that other expressions appropriate to companies are to be construed as references to the corresponding ‘persons, officers, documents or organs’ appropriate to a partnership (Art 3 of the IPO), the uses of these concepts in the IA 1986 do not always lend themselves to an interpretation appropriate to partnerships. The same is also true of the Insolvency (England and Wales) Rules 2016
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applied are not set out. As a result, reference has to be made to the body of the IPO to ascertain which provisions of the IA 1986 apply, to the Schedules to the IPO for the text of the modified provisions, to the IA 1986 and its Schedules for the text of the provisions which are applied without modification and to the Insolvency Rules for certain other details. Thirdly, provisions of the IA 1986 may be modified differently (or applied without modification, or not applied at all) for each IPO procedure. The result is a body of law which is difficult to discern from the various pieces of legislation, and extremely complex.
Definitions
Article 2 of the IPO refers to ‘members’ rather than partners, and defines these as partners and those liable under s 14 of the Partnership Act (see 7.1.7). In order to avoid confusion with the law relating to LLPs, reference will be made to partners rather than members throughout this chapter unless the context otherwise requires, but it should be remembered that the term in this context also includes persons who are held out as partners under s 14.
Article 2 of the IPO defines an ‘officer’ of the partnership as a member or any person who has management or control of the partnership business, although this latter phrase is not further defined. It is therefore important that senior employees who have some management responsibilities (such as a chief executive or internal financial adviser) are made aware of their potential liabilities under the insolvency legislation.
However, Art 3 of the IPO provides that references to shares in a company are to be taken to be references to rights to share in partnership capital or, if the partnership is without capital, to interests conferring any right to share in its profits or liability to contribute to its losses or giving rise to an obligation to contribute to its debts or expenses in the event of a winding up.
Although the IPO refers to contributories, it does not define them. Section 226 of the IA 1986 defines a contributory as a person who is liable to contribute to the assets of the company on winding up and, in a partnership, contributories and partners are therefore likely to be the same people. The IPO provides that partners against whom a concurrent winding up petition has been presented will not generally be treated as contributories (Schs 4 and 6 to the IPO).
12.1.2 LLPs
The scheme of the legislation
Compared to the insolvency regime for general and limited partnerships, that applicable to LLPs is much more closely modelled on the company regime. The IPO is (fortunately) not involved. However, complicated cross references are still required between the IA 1986 and the LLP Regulations which modify and apply it.
Compositions and arrangements are governed by the CA 2006 as applied and modified by reg 45 of the LLP Regulations 2009, and references in this chapter are to the CA 2006 as so applied and modified. The other procedures discussed are governed by the IA 1986 as applied and modified by the LLP Regulations 2001, and references are to the IA 1986 as so applied and modified.
Definitions
Regulation 5 of the LLP Regulations 2001 provides that, for the purposes of the IA 1986, references to a company include references to an LLP, references to a director or to an officer of a company include references to an LLP member, references to a shadow director include references to a shadow member, and references to the memorandum or articles of association of a company include references to the LLP agreement.
12.2 VOLUNTARY ARRANGEMENTS
12.2.1 Partnership voluntary arrangements
A PVA consists either of a composition in satisfaction of the partnership’s debts or a scheme of arrangement of its affairs (s 1 of the IA 1986). These are governed by ss 1–7B of the IA 1986 as applied and modified by Arts 4 and 4A of, and Sch 1 to, the IPO, and references in this paragraph are to the IA 1986 as so applied and modified.
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The proposal
A proposal for a PVA may be made by the partners, unless an administration order, winding up order or joint bankruptcy order has already been made, in which case a PVA may only be proposed by the administrator, liquidator, or trustee in bankruptcy (s 1 of the IA 1986). The legislation does not specify whether the partners have to act unanimously, by a simple majority, or otherwise, in proposing the PVA, although presumably the use of the plural (‘The members’) precludes the making of a proposal by a single partner (see also 12.4.1). Section 24 of the Partnership Act states that ‘ordinary matters’ may be decided by a majority, but that unanimity is required in order to admit a new partner or change the nature of the partnership business (see 6.1.2). That section therefore draws a distinction between day-to-day business decisions, which may be taken by a majority, and decisions which affect the fundamental nature of the partnership, where the implied rule is that of unanimity, and it seems that the proposal of a PVA is more likely to fall into the latter category. This may be impracticable and a clause should be included in the partnership agreement specifying the manner in which such a proposal is to be approved.
The Insolvency Rules provide further detail as to what information must be provided. The proposal must be accompanied by a statement of affairs giving details of:
• the partnership assets;
• any guarantors for the partnership debts;
• any intention to pay dividends to creditors;
• the intended duration of the PVA; and
• the circumstances which will be taken to constitute a failure of the PVA, and the consequences of such failure.
The terms of the proposed PVA must be submitted to a nominee (who must be qualified to act as an insolvency practitioner or authorised to act as a nominee (s 1 of the IA 1986)).
The nominee must report to the court whether the PVA has a reasonable prospect of being approved and implemented and whether meetings of the partners and its creditors should be summoned to consider it (s 2 of the IA 1986).
The moratorium
Partners of a small partnership (defined in Sch A1, paras 3 and 4 to the IA 1986) which is not already subject to an insolvency procedure may obtain a moratorium (s 1A of, and Sch A1 to, the IA 1986). The procedure is initiated as above, but the nominee must be provided with a statement of the partnership affairs together with the proposal, reports to the partners rather than the court, and must also indicate whether the partnership is likely to have sufficient funds available to it during the proposed moratorium to enable it to carry on business (Sch A1, para 6). The partners then lodge with the court (para 7):
• the terms of the proposed PVA;
• a statement of the partnership affairs;
• a statement that the partnership is eligible for a moratorium;
• a statement from the nominee that he consents to act; and
• a statement from the nominee that in his opinion:
– the PVA has a reasonable prospect of being approved and implemented;
– the partnership is likely to have sufficient funds available to it during the proposed moratorium to enable it to carry on business; and
– meetings of the partners and its creditors should be summoned to consider the proposed PVA.
The moratorium comes into force when the documents are filed (para 8). The partners must notify the nominee when the moratorium comes into force, and the nominee must advertise the fact and notify the Registrar, the partnership and any petitioning creditor (paras 9 and 10).
The effect of the moratorium is as follows (Sch A1, para 12 to the IA 1986):
• no petition for winding up may be presented (subject to minor exceptions set out in the legislation) and no order made;
• no petition for administration may be presented and no administrator may be appointed;
• no petition for joint bankruptcy may be presented under Art 11 of the IPO (see 12.6);
• no application for dissolution under s 35 of the Partnership Act (see
11.1.3) may be made;
• no meeting of the partners may be called without the consent of the court of the nominee; and
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• without the consent of the court:
– no agricultural receiver may be appointed;
– no landlord may...
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