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January 2008
Introduction
1) What is a partnership?
In section 1 of the Partnership Act 1890 a partnership is defined as “the relation which subsists between persons carrying on business in common with a view of profit”. This basically means that a partnership is made up of a number of separate members working in business together from which they hope to make a profit.
The maximum number of persons who can form a partnership is usually 20, although this limit does not apply to some professional partnerships such as solicitors and accountants. A member of a partnership can be an individual, a company or even another partnership.
Under the law of England and Wales a partnership is not a separate legal entity from its members and each partner can sue and be sued in their own name, as well as in the name of the partnership. A creditor of the partnership may thus opt to pursue any member of a partnership personally for partnership debts.
2) Does a partnership need a written agreement?
There does not need to be any written agreement for a partnership to exist. A partnership can begin and cease trading informally, without any written agreement or even the express intention of the partners and where there is no written agreement, the provisions of the Partnership Act 1890 apply. The most common form of such informal partnership that the official receiver is likely to deal with is that of a husband and wife where the partnership has been established for tax reasons. In these circumstances it is possible that the wife will know little about the partnership business.
Many partnerships are subject to a formal agreement however. A partnership agreement is generally a type of contract that takes the form of a deed setting out the way in which the partnership will operate. (A deed is a written document which has been signed and sealed as a record of an agreement.) The partners are at liberty to decide on the terms of their own relationship and may choose almost any conditions they wish as long as they are agreed to by all of the partners.
For instance, the partners may agree to vary the distribution of the profits of the business. Instead of the usual arrangement whereby all partners are entitled to share equally in the capital and profits of the business, the partners may make specific arrangements to the contrary so that, for example, the partner who invested the most money in the partnership takes a larger share of the profit.
3) Can a partnership offer limited liability?
The main difference between a company and a partnership, generally, is that there is no limited liability in a partnership and each partner is liable for the debts incurred by the other partners in the course of the partnership business, without limit. Unlike a company there is no system for registering the more common types of partnerships with the Registrar of Companies. However, there is provision in law for registering ’limited partnerships’ and ‘limited liability partnerships’
Limited partnerships are very rare. They consist of one or more members known as ’general partners’, who are liable for all the debts and obligations of the partnership, and one or more members who are called ’limited partners’ and as such are not ‘active’ in the day to day business of the partnership. The ’limited partners’ who contribute a fixed sum to the partnership as capital when they become partners, are not liable for the debts of the partnership beyond that amount. Such arrangements are governed by the Limited Partnerships Act 1907 and must be registered as such with the Registrar of Companies.
It should be noted that a ‘limited partnership’ performs a different role from
that of a ‘limited liability partnership’ (LLP), which was introduced by the Limited Liability Partnerships Act 2000. The LLP is designed as a business vehicle for professional or trading partnerships. It enables partners, all of whom are actively involved in the day to day business of their partnership, to limit their liability for the partnership’s debts and obligations. LLPs are registered with the Registrar of Companies.
In essence, it should be noted that the legal treatment (including insolvency proceedings) of an LLP is very similar to that of a limited company and if an LLP were to be made the subject of a winding-up order, it would be administered by the official receiver as a ‘limited company’ case. The internal rules governing the operation of an LLP are included in its partnership agreement.
4) How does a partnership end (other than via insolvency)?
There are also fixed term partnerships and partnerships at will.
A fixed term partnership, which is only entered into for an agreed length of time, can only be ended under the terms of the partnership agreement, by the death, bankruptcy or winding up of a partner, or by a court order. For example, a fixed term partnership may be entered into to carry out one single project, such as a large building contract.
A partnership at will however, can end simply with one partner giving notice to the others to that effect. The notice will end the partnership from the date given in it or from the date of the communication of the notice if no date is specified.
If a fixed term partnership continues after the end of the fixed term without a new agreement, it is deemed to have become a partnership at will.
A partnership can also be dissolved or ended because of the retirement, death, bankruptcy or winding up of one of the partners, or because of a disagreement between the partners.
5) What is partial dissolution?
Where one partner leaves a firm and the remaining partners continue the business, the partnership is the subject of a partial dissolution. The partners left must value the interest of their former partner in the business together with any outstanding profits and then purchase them from him. If the business continues without any financial arrangement being made, the departing partner may be able to claim a share in the profits of the continuing business.
6) What effect does full dissolution have on the partnership?
Once a partnership is fully dissolved, it is ended as a going concern. The business must then be wound up, the assets collected in and valued, the partnership liabilities paid and any surplus distributed to the former partners.
This winding up may be done outside the scope of the Insolvency Act 1986 or the Insolvent Partnerships Order 1994 (IPO 1994) if it is carried out either by the partners themselves or by a receiver appointed by the court.
7) Bankruptcy orders, winding-up orders and partnerships
The making of a bankruptcy order or winding-up order against a member of a partnership will generally dissolve the partnership (unless the partnership agreement provides to the contrary). However, where the partnership is large or long-standing, the business will be preserved with the trustee or liquidator of the member’s bankruptcy or winding up being paid for their interest in the partnership business. Thus, the old partnership is dissolved and the remaining partners continue with a new partnership. In the case of a limited partnership where a bankruptcy or winding-up order is made against the only general partner, the limited partnership will end.
The partners cannot protect themselves by including a forfeiture clause in any partnership agreement that attempts to forfeit the bankrupt or ‘wound up’ partner’s share in the agreement, to the other partners. Any such clause should be treated as invalid, as it may be a fraud on bankruptcy law.
The official receiver has no right to retain the records of a solvent partnership if he/she is dealing with the bankruptcy or winding up of a partner, although the official receiver can require the solvent partners to provide proper accounts of the partnership trading and access to inspect the records for the purpose of valuing the bankrupt’s or ‘wound up’ partner’s share of it.
Where bankruptcy orders are made against more than one member of a partnership, the official receiver can apply, under Article 14 of the (IPO 1994), for ‘consolidation’ of the cases and ask the court for directions regarding dealing with the partnership estate. For more information, see (Case Help Manual part - Consolidations)
8) Can an individual member be an employee of the partnership?
An individual partner cannot be employed by the partnership business. As the partnership exists only as a relationship between the partners, no partner can be employed in the business as he/she cannot employ him/herself.
As a result, an individual partner is treated as self-employed and is not entitled to any redress for unfair dismissal etc, as he/she cannot avail him/herself of the employment law that exists for employees.
9) Business Names Act 1985
Under the Business Names Act 1985, a partnership which uses a trading style which is not made up of the partner’s surnames, first names or initials, must disclose the name of each partner and an address for service on all business documents, including letters and invoices, and on a prominent notice at the business address. Failure to do so can lead to criminal penalties.
10) Insolvent Partnerships
The IPO 1994 provides for the winding up of insolvent partnerships and the bankruptcy and/or winding up of the partners, operating in tandem with the Insolvency Act 1986.
The IPO 1994 provides five means by which a partnership may be wound up:
a. Winding it up as an unregistered company without any petitions against the members or former members. The petitioner is a creditor, a ’responsible insolvency practitioner’ (IP) or the Secretary of State. (Article 7, IPO 1994)
b. Winding it up as an unregistered company with petitions against one or more members or former members, the petitioner being a creditor in this instance. (Article 8, IPO 1994)
c. Winding it up as an unregistered company without any petitions against the members, where the petitioner is a member. (Article 9, IPO 1994)
d. Winding it up as an unregistered company with petitions against all of the members where the petitioner is a member. (Article 10, IPO 1994)
e. Joint bankruptcy petition by the members without the winding up of the partnership as an unregistered company. (Article 11, IPO 1994)
Proceedings under each of these provisions of the IPO 1994 modify the appropriate sections of the Insolvency Act 1986 as required, and lists those sections affected within the articles.
11) Article 7 – Winding up as an unregistered company by a creditor, responsible IP or the Secretary of State
A partnership can be wound up as an unregistered company under article 7 if:
a. it is dissolved or has ceased to carry on business
b. it is only continuing business to wind up its affairs
c. it is unable to pay its debts
d. the court believes that it is just and equitable that it be wound up
Where the partnership is wound up on the petition of an IP, the court may appoint him/her as liquidator of the partnership in which case the official receiver has an obligation to investigate the partnership affairs but does not need to make a meetings decision. If no IP is appointed, either by the court or at any subsequent meeting, the official receiver will be liquidator of the partnership.
Generally, under article 7 the meetings procedure will be the same as for a company creditors meeting. For further information, please see (Case Help Manual part - Partnership Meetings)
12) Article 8 – Winding up as an unregistered company, with bankruptcy or winding up orders against one or more members, on creditor’s petitions
In this case, the only ground for the petition to wind up the partnership is that it is unable to pay its debts. As far as a partner is concerned, the petition can only be presented in respect of one or more joint debts owed by the partnership. The petitions must be presented to the same court on the same day, unless the court directs otherwise, for example, to allow petitions against other partners or former partners to be added at a later date.
If any order(s) is/are made under article 8 following the discharge of an administration order or voluntary arrangement (VA) in the partnership, the court may appoint the administrator or supervisor of the VA as the ’responsible IP’ in respect of the orders. This means that the IP will become the liquidator of the partnership and trustee or liquidator in the bankruptcy or winding up of the insolvent partners. The official receiver will then have no duty to decide whether to fix a creditors meeting, although the obligation to investigate the affairs of the partnership and any insolvent partners remains.
Where the court has not appointed an IP, the official receiver will become the ’responsible insolvency practitioner’. As such, he/she will become the liquidator of the partnership and the trustee or liquidator in the bankruptcy or winding up of any insolvent partner from the date of the order, rather than the usual appointment as receiver and manager.
The official receiver must then decide whether to call a meeting of creditors within 12 weeks of the date of the orders, the meeting will be held on a combined basis with the creditors of the partnership and of the insolvent partner(s) being treated as one set of creditors for this purpose.
Any IP appointed at the meeting will become the liquidator of the partnership and the trustee of any bankrupt partners, and the liquidator of a ‘wound up’ partner, in the event of that partner being a company or other partnership. If an insolvency order is subsequently made against another member of the partnership, the IP formerly appointed will then automatically become the ’responsible IP’ in respect of that case without the official receiver having to hold another meeting.
Where appropriate, the official receiver can apply for a Secretary of State appointment of an IP in article 8 cases.
13) Article 9 – Winding up of a partnership as an unregistered company, no bankruptcy or winding up petitions against partners, on a member’s petition
A partner in a partnership with 8 or more partners can apply to the court for the partnership to be wound up if:
a. it is unable to pay its debts
b. it is dissolved
c. it has ceased to trade
d. it is only trading to wind up its affairs
e. the court are persuaded that it would be just and equitable to wind up the partnership.
A member of any partnership may also apply to the court for leave to present such a petition if the member has paid £750 or more on behalf of the partnership which has not been repaid, the only ground in such circumstances being that the partnership is unable to pay its debts.
Such a winding up works in the same way as an article 7 order and should be treated in the same way (see paragraph xi).
14) Article 10 – Winding up of a partnership as an unregistered company on member’s petition, with bankruptcy or winding-up petitions against all members
A petition under article 10 can only be presented by a member if:
a. the partnership is unable to pay its debts
b. petitions are presented against every member of the partnership at the same time
c. the partners consent to those petitions being presented
In these circumstances, the orders will be treated in the same way as under article 8 (see paragraph xii). The official receiver will thus become liquidator of the partnership and trustee or liquidator of all partners on the making of the insolvency orders against them.
15) Article 11– Members (all individuals) present a joint bankruptcy petition, but no winding-up order against the partnership
If all the members of a partnership are individuals and there are no limited partners, they can jointly present a petition that they each be declared bankrupt and the partnership business be wound up, without having to apply for the partnership to be wound up as an unregistered company. This is the most common form of proceedings by the members of a partnership and is also known as a ’form 16’ partnership, after the form number of the petition.
If it would be impractical for all of the members of the partnership to file, where for example the whereabouts of one partner is unknown, the court can direct that the petition be presented by such partners as it deems fit.
The only ground for presenting such a petition is that the partnership is unable to pay its debts and, like an ordinary debtor’s petition bankruptcy, the petition must be accompanied by a statement of affairs, in this case, one for each partner’s affairs as well as one for the partnership affairs.
On the making of the bankruptcy orders, the official receiver becomes trustee of the bankruptcy estates and of the partnership estate. Any IP appointed at a meeting of creditors will be trustee for all of the partners and the partnership. If a bankruptcy order under article 11 is made against a member of the partnership later, the IP will automatically become trustee of that estate without the need for a further meeting.
Any meeting of creditors held will be held on a combined basis, with the creditors of the partners and the partnership treated as a single set for notice purposes. However, care must be taken that the creditors are recorded against the correct estates on LOIS as they are treated separately for all other purposes.
If the official receiver deems it appropriate, application can be made for a Secretary of State appointment of an IP as both trustee of the partners’ estates and of the partnership.
16) Fees
Where proceedings against a partnership are brought under articles 7,8,9 and 10 of the IPO 1994, the fee payable is as for winding up proceedings. The winding up deposit allows for petitions to be presented against partners without further deposits being paid to the court. The deposit is credited to the partnership estate, with the appropriate administration fee charged to each estate.
In the case of proceedings brought under article 11of the IPO 1994 (joint bankruptcy petition), one bankruptcy deposit is paid and apportioned equally between each individual partner’s separate estate, but not to the joint estate. An administration fee is then charged in full to each partner’s estate, but not to the joint estate.
Separate accounts must be kept of the joint and separate estates showing all receipts of funds, charging of fees (such as agents fees) and any payments made out of the estates. No fees or remuneration should be charged for the transfer of a surplus from a joint to a separate estate, a distribution from a separate estate to the joint estate, or a distribution from the estate of a separate partnership to the separate estates of the members of a partnership. For further information, see (Case Help Manual part: Distributions– Partnerships)
Notes:
a Partnership property cannot be claimed as exempt property. Any claims made in respect of the partnership property such as motor vehicles and tools of trade are to be dismissed. Reference should be made to partnership accounts or the way in which the item was purchased for clarification, or to support the official receiver’s stance.
b If an individual member of a partnership wishes to apply for an annulment on the grounds of payment in full, it must be made clear that the member is liable to pay the expenses and debts of an insolvent partnership where the assets of the partnership are insufficient to enable the expenses of winding up, and for the debts to be paid.
c If a partnership is not subject to any insolvency proceedings, partnership creditors may still pursue a partner who is subject of a bankruptcy or winding-up order and prove in the bankruptcy or winding up proceedings for the partnership liabilities. The insolvent partner must therefore include any outstanding partnership debts in their list of creditors. Otherwise, the partnership creditors have the right to institute fresh insolvency proceedings.
Where can I find out more?
The Partnership Act 1890
The Limited Partnerships Act 1907
The Insolvent Partnerships Order 1994
The Limited Liabilities Partnerships Act 2000
Technical Manual
Chapter 3 – Initial procedure when winding-up order made
Chapter 4 – Initial procedure when bankruptcy order made
Chapter 11 – Interview and statements Part 5 – paragraphs 11.57 & 58
Chapter 36 – Estate Accounting Part 1 - paragraph 36.10 & Part 7 - paragraphs 36.134 to 36.149
Case Help Manual
Initial contact in Debtor’s Petition cases
Meetings – Partnership Meetings
OROS Protocol Document
LOIS Workbook
Transfer of cases to RTLUs - screen 41
The forms for a partnership will often be the same as for a bankruptcy or company case but even if they are different, they are listed in the main in the other Case Help Manual (CHM) parts referred to elsewhere in this CHM Part. However, there are some other forms, which are specific to partnerships as detailed below. The CARA forms can be accessed by clicking on the appropriate form.
SAPS – ‘Statement of Affairs – Guidance Notes (bankrupt a member of a partnership)’
SAPS – ‘Statement of Affairs – Guidance Notes (company a member of a partnership)’
PIQP – Preliminary Information Questionnaire (Partnership)
NFN4 – Notice for newspaper covering advertisement of winding-up order against a partnership and calling of meetings
CAR A (c1) (partnership) Article 7,8,9 or 10
CAR A (c1) (corporate member) Article 8 or 10
CAR A (b1) (member) Article 8 or 10
Click HERE to view the flowchart for – Partnerships which involve a Partnership Winding-up Order
Click HERE to view the flowchart for - Article 11 Partnership (AKA Form 16)
Procedure
Partnerships which involve a partnership winding–up order
1 Receive details of the order(s) from court. If there are separate bankruptcy and/or winding-up orders made for the partners, the court numbers should all be different.
2 Follow local office procedure as far as the initial enquiries are concerned, and for further information, see (Case Help Manual part- Initial Enquiries)
3 Where the partnership is thought to be still trading, pass the notification of the order(s) and all details of the case to the person responsible for allocating cases to examiners, if not previously allocated. Otherwise, draw the allocated examiner’s attention to the trading status of the partnership.
4 Enter details of the order(s) on LOIS or pass papers to the appropriate person to allow them to do so, LOIS (CA02/03).
5 To produce partnership notices in LOIS (DO73), fill in the registered office address on LOIS (CA03) with trading address details, leaving the trading address blank, then produce forms:
LCAD – ‘Letter covering advertisement’
NFN4 – ‘Notice of winding-up order (for newspaper)’ (Specifically for winding up of a partnership and calling of meetings)
NORD 1 –‘Notice of order’
PSOL – ‘Letter to petitioner’s solicitors’ (if applicable)
L72.24 – ‘Gazette notice WUO (Partnership case – partnership)’
6 Next, clear registered office entry (trading address details) from LOIS (CA03), fill in trading address, LOIS (DO73/PU405/PU501), and produce form NTSH, LOIS DO73 – ‘Notice to sheriff’ (Includes a ‘Return of executions levied’ sheet)
7 Ensure that the interview appointment(s) details are entered on LOIS (CA2 4). Then produce forms NTCO, LOIS (DO73) ‘Notice to company officers’. Option to choose and complete ‘partnership’ and ‘appointment’ details is available in ‘print preview’. Produce as many appointment letters as are required and enclose booklet, PIQP, ‘Preliminary Information Questionnaire (partnership)’ with each form NTCO.
8 Once the preliminary interview has been completed, prepare either creditors ‘meeting’ or ‘no meeting’ notices (or pass papers to the appropriate person for them to be prepared), and forward them for despatch, according to local office practice.
9 Ensure that the lists of creditors have been input on LOIS (CA31) with each separate list recorded against the correct estate. Form ADHOC, LOIS (DO73) ‘Mail merged document for adhoc letters’ is a facility to print using the list of creditors on LOIS (CA31), which allows for a covering letter where necessary.
Although the lists of creditors can be combined for the purpose of issuing notices, they must be recorded separately on LOIS (CA31). Prepare and dispatch notices as if for a company, taking care that there are none prepared for contributories. For further information, see (Case Help Manual parts - No First Meeting and Partnership Meetings).
10 If a meeting of creditors is held and an insolvency practitioner is appointed, do not forget that the insolvency practitioner will be liquidator of the partnership and trustee and/or liquidator for any insolvent partners, and that all of the cases should be handed over as a result.
11 If the official receiver remains liquidator/trustee, administer the cases in the usual manner.
12 At the appropriate time, if not handed over to an IP, where no bankruptcy and/or winding-up orders were made against partners, the partnership case can be closed in the same way as for a limited company. For further information, see (Case Help Manual part - Closing a Case).
13 Where there was a partnership winding-up order and bankruptcy and/or winding-up orders made against partners, a check must be made that the ledgers show the correct fees, if any, (such as agents).
14 The winding up deposit should be credited to the partnership estate. If there are bankruptcy or winding up orders against partners, there will be no deposit shown on their estate ledgers, as the one winding up deposit will cover any subsequent petitions against partners.
15 The appropriate administration fee should be charged on each separate estate.
16 If any of the estates have a credit balance.
Consideration may be given to transferring credit balance cases to a Regional Trustee Liquidator Unit (RTLU), depending on the amount of the credit balance and any other criteria that may be applicable. For more information, see (OROS Protocol Document – Protocol Governing the relationship between Official Receivers (ORs) and Regional Trustee Liquidator Units (RTLUs)) and (LOIS Workbook – Transfer of cases to RTLUs - screen 41)
Article 11 Partnership – Joint debtors’ petition (AKA Form16)
1 Receive details of the order(s) from court. There should only be one court number.
2 As at least one of the members of the partnership should be present at court, initial enquires should be made in accordance with local office procedures. For further information, see (Case Help Manual Parts: Initial Contact in Debtor’s Petition Cases)
3 If the partnership is, or is thought to be still trading, pass the notification of the order and all other relevant information to the person responsible for allocating cases to an examiner, if not already done. Otherwise, check that the allocated examiner is aware that the partnership is still trading.
4 Ensure that any appointments for interview that have been made are recorded on LOIS (CA24).
5 Enter details of the order on LOIS or pass papers to the appropriate person to allow them to do so, LOIS (CA02/03). Screen 2 should include the partnership and the bankruptcy case details.
6 The forms in this type of partnership are primarily bankruptcy forms, which can be adapted for the partnership. The forms to be produced via LOIS (DO73) are produced either for the joint partnership estate or for the individual partners in bankruptcy as follows:
LCAD – ‘Letter covering advertisement’ (Joint)
NORD1 – ‘Notice of order’ (Joint)
NFN1 – ‘Notice for newspaper’ (Joint)
NTSH – ‘Notice to sheriff’ (for partnership and each partner in bankruptcy)
B37.35 – ‘Gazette notice – bankruptcy order, partnership case, debtors petition, individual member’ (joint)
NTB1 – ‘Notice to bankrupt’ (with appropriate enclosures)
NTB2 – ‘Notice to bankrupt’ (after-acquired property, one for each partner)
LRRABO – ‘Land Registry, register BO or amend order’ (one for each partner)
7 Ensure that appointment details are entered on LOIS (CA24), with a separate appointment for each partner if specified. The ‘post held’ option should be ’partner’.
8 Guidance should be sought from the examiner regarding the sending of appointment letters, (form NTB1, LOIS (DO73) and any enclosures. The main partner should be sent the booklet PIQP ‘Preliminary Information Questionnaire (Partnership)’.
9 Ensure that the separate lists of creditors have been input on LOIS against the correct estates, LOIS (CA31). Form ADHOC, LOIS (DO73) ‘Mail merged document for adhoc letters’ is a facility to print using the list of creditors on LOIS (CA31), which also allows for a covering letter, where appropriate.
10 Either prepare or have prepared the ‘meeting’ or ‘no meeting’ notices for each case as notified by the examiner, LOIS (CA21). For further information, see (Case Help Manual parts: - No First Meeting and Calling a Meeting)
11 Where a meeting held appoints an IP, the appointment will be as trustee for all of the bankruptcies and the partnership. If so, ensure that the relevant papers for each estate are handed over.
12 Where the official receiver remains trustee, continue with the usual case administration.
13 At the appropriate time, if not handed over to an IP, the cases can be closed in the same way as any bankruptcy order case. Although consisting of at least three estates, form 16 partnerships are treated as one single case. For further information, see (Case Help Manual part – Closing a Case)
14 When it comes to closing, check that the ledgers show the correct fees, (such as agents fees). Remember that, although no order is made against the partnership estate, a bankruptcy joint estate account must still be opened.
15 The deposit should be apportioned equally between the separate bankruptcy estates but not to the joint estate.
16 An administration fee is charged to each separate bankruptcy estate but not to the joint estate.
17 If any of the estates have a credit balance, see (Case Help Manual parts: - Payments from the Estate: Bankruptcy and Company and Payments from the Estate: Partnerships)
Consideration may be given to transferring credit balance cases to a Regional Trustee Liquidator Unit (RTLU), depending on the amount of the credit balance and any other criteria that may be applicable. For more information, see (OROS Protocol Document – Protocol Governing the relationship between Official Receivers (ORs) and Regional Trustee Liquidator Units (RTLUs)) and (LOIS Workbook – Transfer of cases to RTLUs - screen 41)