Dealing with and untangling Insolvent Partnerships

In his latest Coffee Break Briefing webinar, Frettens’ own Insolvency Guru Malcolm Niekirk looked at the rare and notoriously difficult to deal with Insolvent Partnerships.

This is the summary of that briefing.

If you'd like to watch the webinar back, you can do so below, if not, read on for our summary.

Quick Links

• What is a partnership
• Analysing the estates within a partnership
• Options for dealing with an insolvent partnership
  • Bankruptcy
  • Voluntary Arrangement
  • Administration
  • Other options

What is a partnership?

According to the Partnership Act 1890, partnership is a relation between people who carry on a business in common with a view of profit.

This does not include businesses that are registered under the Companies Act 2006 or under any other Act of Parliament, letters patent or Royal Charter. Non-profit organisations, such as charities, clubs and societies, are also excluded.

In addition, a partnership is not a corporation.  Thus, it has no legal personality.  This means the ‘normal’ insolvency rules that apply to companies do not apply to them in the same way.

Its important to note that, under the statutory definition:

• Shareholders in a company are not also partners
• You can have a partnership of people or companies (or both)
• ‘Partnership’ is a relationship, not an entity (or a ‘person’)
• It happens automatically when persons come together to do business to make a profit

What’s the difference between a company and a partnership?

Here are some key differences between the two:

As a result of the above, a partnership is a complicated mix of several estates and, as insolvency practitioner, you’ll need to unscramble them.

How do practitioners analyse the estates within a partnership?

As you can see by the below diagram, unscrambling an estate can become quite complicated quite quickly.

As well as the partner’s joint estate, shown in the centre of the diagram where their interests overlap, some of the partners may also have:

• Joint matrimonial estates with their spouses
• Other partnerships with each other (e.g. red having an additional partnership with green)

As well as being responsible for their own personal debts, each partner is also jointly and severally liable for all of the debts of the partnership, regardless of which partner(s) may have incurred that debt.

Suppose the green partner is bankrupt, and they personally own some of the partnership property. They will own that property on trust for the partners, so it would be outside the bankrupt estate.

Therefore, the bankrupt estate’s interest in the partnership will be only the net balance on the green partner’s current account and capital account.

Options for an insolvent partnership

Option 1: Bankruptcy

There are several bankruptcy options.

To deal with the partnership assets you may need a court order for the partnership estate to be wound up in bankruptcy, with you appointed trustee of it. That would then apply the bankruptcy rules to the partnership, effectively making a bankruptcy order against that joint estate.

Alternatively, the partnership could be wound up as an unregistered company, in a compulsory liquidation.

Absent either of those circumstances, where the partners are bankrupt you could allow them to realise the partnership assets themselves (under your supervision).  This would be appropriate only if their value is modest.

Option 2: Voluntary Arrangement

This could be a set of interlocking IVAs or a single partnership voluntary arrangement (PVA).  PVAs are usually written as a modified CVA with changes appropriate for a partnership rather than a company.

If preparing (non-interlocking) IVAs for individual partners, those IVAs should not normally deal with partnership property.  The debtor’s

interest in the partnership is only to collect the surplus (if any) owing on the current and capital accounts in the partnership.  If there is a surplus, the debtor is a creditor of the partnership.  It’s more likely there is a deficit, in which case the debtor is a debtor of the partnership).

Interlocking IVAs of all partners can deal with partnership property, by agreement.  But, if you do that, watch out for conflicts of interest.

A PVA should not deal with the partners’ personal estates or debts.  It’s quite likely that some of the partners may need IVAs or bankruptcy. Again, watch out for conflicts.

Option 3: Administration

Administration is a ‘first aid’ procedure for insolvent partnerships, to ringfence and protect the assets.

In an administration, you will need to have an exit in mind, often a PVA or interlocking IVAs.

However, it’s not always clear which debts are business debts, or how well the administration will protect the individual partners’ estates from business creditors.  You may need IVA interim orders to do that.

Non-options

CVL is not an option, as there is no CVL procedure for partnerships.

In situations where you would look at a CVL for a company, you might find a PVA useful.  It offers a mechanism for orderly closure of the business, winding up its affairs and distributing realisations to creditors.

Similarly, there is no MVL procedure for partnerships. But, it is possible to dissolve a solvent partnership, either by agreement or with a court order.

Upcoming events

Thanks for reading this summary…

My next Coffee Break Briefing will be on Monday 10^th February, where I’ll be expanding on Insolvent Partnerships, looking at post appointment issues.

Make sure you’re subscribed to our email list to receive event information and webinar links straight to your inbox.

Specialist Insolvency Solicitors

If you have any questions after reading this article, please don’t hesitate to get in touch with our bright and experienced team.

Call us on 01202 499255, or fill out the form at the top of this page, for a free initial chat.