Dissociation and Dissolution of a Partnership Flashcards
What is Dissociation?
Dissociation is a change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business. Dissociation of a partner does not necessarily cause a dissolution and winding up of the partnership business. When a partner dissociates from a partnership, the partner withdraws or “bows out” of the partnership
What are the main events that lead to Dissociation?
A partner becomes dissociated from the partnership by:
- Oral or written notice of the partner’s express will to withdraw
- Happening of an agreed event
- Valid expulsion of the partner
- The partner’s bankruptcy or the appointment of a receiver for a partner
- The partner’s death or incapacity to perform partnership duties
- The decision of a court that the partner is incapable of performing a
partner’s duties - Termination of a business entity that is a partner
What is Wrongful Dissociation?
A partner will be deemed to have wrongfully dissociated if the dissociation is in breach of an express term in the partnership agreement. A dissociation is also wrongful in a term partnership if the partner withdraws, is expelled, or becomes bankrupt before the end of the term.
- A partner who wrongfully dissociates is liable to the partnership for any damages caused by the dissociation.
At-Will Partnership: A partnership where the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking.
- DEFAULT FORM OF PARTNERSHIP
Term Partnership: A partnership where the partners have agreed, explicitly or implicitly, to remain partners for a definite term or until the completion of a particular undertaking.
What are the consequences of dissociation for the Partnership?
When a partner dissociates from a partnership, one of two statutory avenues is implicated:
- The partnership is dissolved and that its business must be wound up. This means that the partnership business will be liquidated ( “sold off”) OR
- The partnership continues in existence with the dissociated partner becoming entitled to a buyout of their partnership interest.
What are the consequences of dissociation for the Partner?
Upon a partner’s dissociation, their right to participate in management ceases. The partnership must purchase (buy out) their interest at either liquidation or going-concern value, and must indemnify them against known pre-dissociation liabilities, as well as against post-dissociation liabilities not incurred by the dissociating partner’s acts.
- However, a partner who wrongfully dissociates before the expiration of a partnership term or completion of a particular undertaking is NOT entitled to payment of the buyout price until the term expires or the undertaking is completed, unless they can establish that earlier payment will not cause undue hardship to the partnership business.
What is Dissolution?
Unlike dissociation, dissolution generally requires the partnership business to be wound up. When dissolution and winding up occur, partnership assets must be applied to the discharge of partnership liabilities. If the assets are insufficient, individual partners are required to contribute (“pay in”) in accordance with their loss shares. If there are excess assets, they are distributable to the partners in cash in accordance with their profit shares.
Two circumstances are of particular importance:
- In general, when a partner dissociates by express will in an at-will partnership, the partnership is dissolved and its business must be wound up.
- In a term partnership, if one partner dissociates wrongfully, or if a dissociation occurs because of a partner’s death or bankruptcy, dissolution and winding up of the partnership are required only if, within 90 days after the dissociation, at least one-half of the remaining partners agree to wind up the partnership.
Dissolution and winding up are required only in limited circumstances (event in agreement requiring winding up, business becomes illegal, issuance of a judicial decree, unanimous consent of the partners in a term partnership, expiration of a term partnership).
What happens when a partner’s dissociation DOES NOT result in a dissolution and winding up?
If a partner’s dissociation does not result in a dissolution and winding up, the partner is entitled to receive a buyout of his partnership interest. The remaining partners may continue the business. If the dissociation is wrongful, any damages will be offset against the buyout price.
What is the Liability of a Dissociated Partner?
Pre-Dissociation: Generally, a dissociated partner remains liable for pre-dissociation partnership obligations (a creditor can agree to release the withdrawing partner, however, from specific obligations).
Post-Dissociation — A dissociated partner can be liable for post-dissociation partnership liabilities incurred within two years after the dissociation (assuming that dissolution has not occurred) if:
- When entering the transaction the other party reasonably believed the dissociated partner was still a partner
- Did not have notice of the partner’s dissociation.
When can a Dissociated Partner have the Power to Bind Partnership?
A partnership can be bound by an act of a dissociated partner undertaken within two years after dissociation (assuming that dissolution has not occurred) if:
- The act would have bound the partnership before dissociation,
- The other party to the transaction reasonably believed the dissociated partner was still a partner and did not have notice of the dissociation.
What is the Rule for Dissolution of a Partnership At Will?
When a partnership is formed with no particular undertaking or definite term, it is said to be a partnership at will. A partnership at will can be dissolved at any time by the express will (for example, notice of dissolution) of any partner without penalty.
What events trigger dissolution under the RUPA?
The following events trigger dissolution under the RUPA:
1) In a partnership at will, notification by any partner of an express will to withdraw as a partner
2) In a partnership for a definite term or particular undertaking when:
- Expiration of the term or completion of the undertaking
- Consent of all of the partners to dissolve AND
- Within 90 days after a partner’s death, bankruptcy, or wrongful dissociation, at least half of the remaining partners wish to dissolve
3) The happening of an event agreed to in the partnership agreement that requires winding up the partnership business;
4) The happening of an event that makes it unlawful for the partnership to continue;
5) Issuance of a judicial decree on application by a partner that:
- The economic purpose of the partnership is likely to be frustrated OR
- A partner has engaged in conduct making it not reasonably practicable to carry on the business
- The business cannot practicably be carried on in conformity with the partnership agreement;
6) Issuance of a judicial decree on application by a transferee of a partner’s interest that it is equitable to wind up the partnership:
- After the term expires or the undertaking is completed in a partnership for a definite term or particular undertaking OR
- At any time in a partnership at will; and
7) The passage of 90 consecutive days during which the partnership does not have at least two partners.
What is the Priority of Distribution when Dissolution is Involved?
Each level of priority must be fully satisfied before beginning the next level:
- The partnership must pay ALL creditors
- The partnership must repay ALLcapital contributions paid into the partnership by partners
- Profits or losses (if any)
Creditors include “outside creditors” (trade creditors, lenders, suppliers) and “inside creditors” (partners who loaned money)
Does a Partnership End When Dissolution Occurs?
The partnership continues to exist after dissolution UNTIL the partnership is wound up
May a Partner Still Have Apparent Authority After Dissolution?
Partners retain apparent authority to bind the partnership to a third party on new business even after an event requiring winding up. A partnership can be bound after dissolution by any act of a partner appropriate for winding up the partnership’s business.
- The partnership will also be liable for other acts if the party with whom a partner dealt did not have notice of the dissolution.
- The partnership can protect itself by notifying creditors directly of the dissolution (effective immediately)
Can a Dissolution be Waived?
YES! Any time before the winding up of the partnership business is complete, the partners may decide to waive the dissolution and continue the partnership by UNANIMOUS vote of the partners who have not wrongfully dissolved. Such waiver does not affect the rights of persons who have relied on the dissolution before receiving notice of the waiver.
