Liquidation: Partnerships

AuthorElspeth Berry/Rebecca Parry
Pages265-398

Chapter 6


Liquidation: Partnerships

6.1 SCHEME OF THE INSOLVENCY ACT 1986 AND THE INSOLVENT PARTNERSHIPS ORDER 1994 FOR PARTNERSHIP LIQUIDATION

The IPO modifies the IA 1986 to provide four alternative winding up procedures for partnerships. All four procedures involve the winding up of the partnership as an unregistered company, and all four involve winding up by the court; no partnership may be wound up voluntarily.1The four procedures vary according to the identity of the petitioner and whether petitions are also presented against partners, and may be summarised as follows:

(1) winding up on the petition of a creditor (or certain other third parties) (‘creditors’ petitions’), either:
(a) with concurrent actions against one or more current or former partners (‘creditors’ concurrent petitions’), or

(b) without such actions (‘creditors’ sole petitions’);
(2) winding up on the petition of a partner (‘partners’ petitions’), either:
(a) with concurrent actions against all of the current partners (‘partners’ concurrent petitions’), or

(b) without such actions (‘partners’ sole petitions’).

Concurrent petitions should be brought if there is any doubt about the solvency of the partnership, since partners’ personal assets will not be available unless insolvency procedures have been applied to the partners themselves.2

1IA 1986, s 221(4), as modified by IPO, Sch 3, Pt I, para 3/Sch 4, Pt I, para 4/Sch 5, para 2/

Sch 6, para 4.

2Investment and Pensions Advisory Services Ltd v Gray [1990] BCLC 38.

266 Law of Insolvent Partnerships and Limited Liability Partnerships

The legislation refers to ‘members’ petitions’ rather than ‘partners’ petitions’ but since this book also covers the winding up of LLPs (see Chapter 7) and thus discusses petitions by LLP members, the term ‘partners’ petitions’ will be used in relation to the winding up of general and limited partnerships in order to distinguish clearly between the partnership and LLP procedures.

6.2 DISSOLUTION AND WINDING UP UNDER THE PARTNERSHIP ACT 1890

Before discussing the four IPO procedures, it is worth noting that a partnership may instead be wound up informally under the Partnership Act. The first stage is dissolution which, subject to contrary agreement, will occur automatically:

 if the partnership is entered into for an undefined period (referred to in the Partnership Act as a ‘partnership at will’), on the giving of notice by any partner;3

 if the partnership is entered into for a fixed term or a single undertaking, on the expiry of that term or the termination of that undertaking4(unless the partnership is in fact continued, in which case it will become a partnership at will5);

 on the bankruptcy or death of any partner;6or  on the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership.7

If a partner’s share in the partnership is charged for his private debt, the other partners have the option of dissolving the partnership.8

3Partnership Act, s 32(c).

4Partnership Act, s 32(a) and (b).

5Partnership Act, s 27.

6Partnership Act, s 33(1). The Act does not specify that the occurrence of the equivalent events for a corporate partner – i.e. its winding up or dissolution – will cause dissolution of the partnership.

7 Partnership Act, s 34.

8Partnership Act, s 33(2).

A partner may also apply to court for dissolution if one or more of the following grounds is satisfied:

 another partner becomes permanently incapable of performing his part of the partnership contract;

 another partner has been guilty of conduct which is calculated to prejudicially affect the partnership business;

 another partner has wilfully or persistently breached the partnership agreement;

 another partner has conducted himself in relation to the partnership business in such a way that it is not reasonably practical for the other partners to carry on the business in partnership with him;

 the business can only be carried on at a loss; or  in the opinion of the court it is just and equitable to dissolve the partnership.9

A particular difficulty has arisen as to whether the concept of repudiatory breach of contract applies to a partnership agreement and, if so, whether acceptance of such a breach results in automatic dissolution. In Hurst v Bryk,10 all bar one of the partners entered into a dissolution agreement. The other partner, Hurst, argued that this was a repudiatory breach of the partnership agreement which he had had no alternative but to accept, with the result that he was discharged from any obligations under the partnership agreement, including the obligation to contribute to the liabilities of the firm which had been incurred prior to the dissolution.

Lord Millett gave the leading judgment. While noting that the doctrine of accepted repudiation was of general application in the law of contract and that there was no reason why it should not apply to a partnership agreement,11he

doubted whether it could apply to the partnership relationship.12 Thus, while acceptance resulted in the discharge of the parties from further performance of the agreement,13it was doubtful that it could bring about the automatic dissolution of the partnership relationship.14 Lord Millett stated that while

9Partnership Act, s 35.

10[2000] UKHL 19, [2002] 1 AC 185.

11[2000] UKHL 19, [2002] 1 AC 185 at 193 per Lord Millett.

12[2000] UKHL 19, [2002] 1 AC 185 at 195 per Lord Millett.

13McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476–477 per Dixon J.

14[2000] UKHL 19, [2002] 1 AC 185 at 193 per Lord Millett.

268 Law of Insolvent Partnerships and Limited Liability Partnerships

partnership was a consensual arrangement based on agreement, it was more than a simple contract; it was a continuing personal relationship as well as a commercial relationship. A partner had no cause of action, before or after dissolution, to recover money owed to him by the other partners; such an amount was recoverable only by the taking of an account.15Repudiatory breach of contract was not referred to in the Partnership Act as a ground for dissolution, and indeed such behaviour was effectively covered by section 35(d) (see further above), which gave the court a discretion to dissolve a partnership if a partner wilfully or persistently breached the partnership agreement, or otherwise so conducted himself in matters relating to the partnership business that it was not reasonably practicable for the other partners to carry on in partnership with him.16

As the lower courts in Hurst v Bryk had held that the dissolution of the partnership was brought about by Hurst’s acceptance of his partners’ repudiatory breach of contract, Lord Millett’s comments were strictly obiter. However, they were followed by Neuberger J in Mullins v Laughton.17The claimant and the respondents had been in partnership together. The respondents alleged that the claimant had agreed to leave the partnership, while the claimant alleged that the respondents’ action in making it clear to him that they were no longer prepared to work with him and requiring him to leave constituted a repudiation of the partnership which he accepted. The court held that a partnership could not be dissolved by accepted repudiation.18

After dissolution, the Partnership Act provides that any partner may require the dissolution to be publicised,19and that the authority of each partner is restricted to acts necessary to complete unfinished transactions and wind up the business.20

The partners may wind up the partnership themselves, but any partner may apply to the court to wind up the business21and the court may appoint a receiver (see further 5.9). The duty of good faith which partners owe each other22

continues after dissolution and until winding up of the partnership is complete.23

15[2000] UKHL 19, [2002] 1 AC 185 at 194 per Lord Millett.

16[2000] UKHL 19, [2002] 1 AC 185 at 195–196 per Lord Millett.

17[2002] EWHC 2761 (Ch), [2003] Ch 250.

18[2002] EWHC 2761 (Ch), [2003] Ch 250 at [93] per Neuberger J.

19 Partnership Act, s 37.

20Partnership Act, s 38.

21 Partnership Act, s 39.

22Const v Harris 37 ER 1191, (1824) Turn & LR 496.

23Thompson’s Trustee in Bankruptcy v Heaton [1974] 1 WLR 605.

Beyond what is set out in the Partnership Act, a number of practical steps must be taken. Dissolution is likely to terminate bank facilities and so borrowing should be repaid before dissolution. Arrangements may need to be made for clients or work to be transferred to other firms. Partnership obligations in the name of individual partners (such as leases) will need to be determined. Insurance for future claims should be obtained and obligations to employees and partners will need to be settled. Dissolution will not necessarily terminate leases or other contracts if made in the names of the partners, but their exact wording should be checked. The Court of Appeal held in Rose v Dodd24 that although dissolution would normally terminate contracts of employment, this was not the case in all circumstances.

Any profits or losses generated after dissolution are governed, subject to contrary agreement, by sections 24(1) and 42(1) of the Partnership Act. Section 24(1) provides for the equal sharing of capital, and of profits and losses, and section 42(1) provides that if the business of a dissolved partnership is carried on without any settlement of accounts, an outgoing partner is entitled at his option to such share of the post-dissolution profits as is attributable to the use of his share...

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