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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 Formand we will be in touch.  Alternatively, call our FREE ADVICE LINE on 0800 781 0990. 

If you've read through our section and feel like you would like some further information, please call us on our 0333 9999 600 and one of our advisors will give you the right help and advice based on your individual circustance.