5: Dissolution of Partnerships

Question 1

What is dissolution?

Answer 1

A procedure by which a partnership is brought to an end.

Question 2

How can a partnership be dissolved?

Answer 2

1. By mutual agreement
2. By expiry or notice
3. By express clause in the agreement
4. By death or bankruptcy
5. By illegality
6. By the court
7. By s96 Mental Health Act 1983

Question 3

What is dissolution by mutual agreement?

Answer 3

A partnership can be dissolved at any time if all parties agree to do so - it is a contractual relationship.

Question 4

What form must the agreement to dissolve the partnership take if by mutual agreement?

Answer 4

It doesn’t matter what form the agreement takes, so even if a partnership formed by deed can be terminated by an oral agreement between the partners.

Question 5

Which section of PA 1890 talks about dissolution by expiry or notice?

Answer 5

ss32 and 26 (about partnership at wills for s32(c))

Question 6

What are the three parts of s32 PA 1890?

Answer 6

s32

a) at the end of fixed term

b) at the end of a single venture or undertaking

c) if for an undefined time, by any partner giving notice to dissolve the partnership

Question 7

When will the dissolution take place according to s32(c) depending on whether the notice has a date on it or not?

Answer 7

If it has a date: on that date

If it doesn’t have a date: from the date of the communication of the notice

Question 8

How must the notice in s32(c) be communicated?

Answer 8

It can be oral unless the partnership is created by deed (when it then must be in writing).

Question 9

What is dissolution by an express clause in the agreement? Give 2 examples.

Answer 9

For example, if a partner becomes mentally unsound or acts dishonestly, the express clause may allow for dissolution?

Question 10

Which section allows for dissolution by death or bankruptcy?

Answer 10

s33 states that the partnership automatically dissolves on the death or bankruptcy of any partner.

Question 11

Which section allows for dissolution by illegality?

Answer 11

s34 states that a partnership is dissolved automatically if anything happens which makes it unlawful to carry on the firm’s business or to carry on in the partnership, even if it wasn’t illegal when it started.

Question 12

Can s33 and s34 be excluded in the partnership agreement?

Answer 12

s33: death or bankruptcy is often excluded

s34: illegality cannot be excluded

Question 13

What are the 5 situations outlined in s35 PA 1890 where the court can dissolve a partnership?

Answer 13

(a has been replaced by the Mental Health Act 1983)

b) Permanent incapacity (other than mental disorder)
c) Prejudicial conduct
d) Persistent or wilful breach of the partnership agreement
e) Carrying on at a loss
f) Where it is just and equitable that the partnership be dissolved

Question 14

What must be present for s35(c) Prejudicial conduct to apply?

Answer 14

Some damage to the firm’s business or reputation.

Question 15

What would count as persistent or wilful breach of the partnership agreement, s35(d)?

Answer 15

When the partner conducts themselves in such a way that they lose the confidence of their other partners and they feel that it is impossible to carry on the business. E.g. inaccurate accounts, refuses inspection of dealings, mutual confidence is destroyed.

Question 16

When would carrying on at a loss, s35(e), apply?

Answer 16

When it is impossible for the firm to ever make a profit. It doesn’t have to be actually insolvent.

Question 17

What situations would s35(f) be used, where it is just and equitable that the partnership be dissolved?

Answer 17

Continuing hostility between partners, refusal to hold meetings.

Assigning share to an outsider and resulting in an intolerable situation for other partners.

Question 18

Can the partner who has been the main cause of the breakdown of the partnership be allowed to petition for dissolution to the courts?

Answer 18

The court may refuse to allow a petition from that partner.

Question 19

Which section of the Mental Health Act gives the court the power to dissolve a partnership of which a mental health patient is a member?

Answer 19

s96 Mental Health Act 1983

Question 20

Are the partners of a dissolved partnership still liable on contracts entered into with outsiders before the dissolution?

Answer 20

Yes, according to s36 they are still liable for contract with outsiders who thinks they are dealing with the partnership until they are given notice of dissolution.

Question 21

What must the partners make sure to do after dissolution?

Answer 21

Give notice of dissolution to avoid continuing liability to clients. They must give notice to everyone else via the London Gazette.

Question 22

What does s37 allow partners to do?

Answer 22

s37 allows any partner to give the necessary notices under s36.

Question 23

What is winding up?

Answer 23

The process of selling the assets and using them to pay the creditors and partners.

Question 24

How long do a partner’s authority and their rights and duties continue after disslution?

Answer 24

According to s38, a partner’s authority etc continues so far as is necessary to wind up the affairs or the partnership and complete unfinished transactions.

Question 25

What is meant by forcing a sale of the assets, s39?

Answer 25

After dissolution, a partner can force the partnership’s property to be sold and used towards paying its liability, with surplus distributed to the partners.

Question 26

What is goodwill?

Answer 26

The value of a business’s reputation.

Question 27

How do you value goodwill?

Answer 27

Valuing goodwill is an expert task, often done by accountants. It is based on business’s profitability and its degree of customer loyalty.

Question 28

Why is dissolving a partnership damaging to goodwill?

Answer 28

Dissolving a partnership destroys the value of goodwill at one stroke.

Question 29

What is a sale as a going concern?

Answer 29

When the entire business can be sold to the same purchaser, who pays for the goodwill as part of the transaction.

Question 30

Why is selling the goodwill as a going concern potentially negative?

Answer 30

It may bring unwanted tax consequences - goodwill has zero value at the beginning of a business, but partners have to pay CGT on the whole of the goodwill.

Question 31

What do final accounts cover?

Answer 31

They cover all transactions from the date of the partnership’s last accounts to the date of dissolution, including transactions occurred in the course of winding-up.

Question 32

What does s44 PA 1890 cover?

Answer 32

s44 PA 1890 covers the distribution of assets.

Question 33

What is the order in which the proceeds of selling the partnership’s assets are distributed, according to s44 PA 1890?

Answer 33

1. Pay debts and liabilities to non-partners (lenders, suppliers)

(Costs of winding-up)

2. Repay loans to partners (incl. interest)
3. Repay each partner’s capital contributions
4. Pay surplus to partners in accordance with their agreed profit shares.
5. If there is a shortfall at 1, 2 or 3, the firm is insolvent. The partners must pay shortfall from their private assets in proportions agreed to contribute to the firm’s losses.

Question 34

How can s44 be overridden?

Answer 34

By agreement between the partners, e.g. in partnership agreement.

Question 35

What happens if a partner is required to contribute to a shortfall but cannot do so?

Answer 35

The partner is insolvent and may be declared bankrupt.

Question 36

If a partnership cannot pay its debts, what does it become?

Answer 36

Insolvent.

Question 37

Under which Act are insolvent ordinary partnerships wound up?

Answer 37

Under Part V Insolvency Act 1986.

Question 38

In the Insolvency Act 1986, how are partnerships referred to as?

Answer 38

Unregistered company

Question 39

Where are the rules on the application of Part V Insolvency Act 1986 set out?

Answer 39

Insolvent Partnerships Order 1994.

Question 40

What are three important points of the Insolvent Partnerships Order 1994?

Answer 40

1. Partnerships have many of the same procedures available as companies, e.g. voluntary arrangements/administration.
2. Partners can be treated as company directors, so may be liable to disqualification under the Company Directors Disqualification Act 1986.
3. Rules govern the order in which type of assets pay off debts, e.g. partnership assets (pay partnership debts) and partners’ personal assets (pay personal debts). If surplus of either, they are put toward the other debts.