In this article, insolvency solicitor Eleanor Stephens discusses the different insolvency options available to partners and the consequences of becoming insolvent.
Contents:
What is a partnership in the UK?
There are 3 types of partnerships in the UK, and the type of partnership you are a member of will make a significant difference to how insolvency may affect you.
General partnership (GP)
This is where individuals come together to form a partnership in order to make a joint profit. This is not a separate legal entity in the same way that a company is. The partnership is essentially made up of individuals, who are all liable as individuals personally if the partnership becomes insolvent, along with the partnership itself if assets are owned by the partnership.
A limited partnership (LP)
Like a general partnership, this is not a separate legal entity. However, a limited partnership will have one or more general partners, who are liable for all of the debts and obligations of the firm. It will also have one or more limited partners, who do not take part in the management of the partnership business or have the power to bind the firm as the general partners might, but equally do not have personal liability for the partnership.
A limited liability partnership (LLP)
This is fundamentally different to a general or limited partnership in that it is a partnership with a separate legal entity. This means that the individual partners are only liable up the limit of their investment and will not be individually liable on the insolvency of the LLP. General partnership law does not apply to an LLP, and it is treated more like a company.
Each of these partnerships are treated differently in the event of insolvency, of either the partnership or individual members. We look at this in more detail below.
General Partnership insolvency
Administration
A general partnership is able to go into administration during which the partners will not be personally liable for the debts of the partnership while the partnership is in administration. Like a company administration, there will be a moratorium during the administration which prevents a creditor bringing a claim or a winding up petition against the partnership during this period.
Voluntary Arrangement
A general partnership is able to enter a voluntary arrangement to reach agreement with its creditors in the same way that a company may. However, because individual partners are also personally liable for the partnership debts, it is usual that the individual partners will enter into an Individual Voluntary Arrangement (IVA) at the same time, with the same creditors. Otherwise there is no incentive for the partnership creditors not to come after the individual partners.
Winding up
A general partnership may be wound up by a creditor. This is similar to a company winding up, although it is not possible for a general partnership to wind itself up in this way. As the partners are also individually liable for the debts of the partnership, then the winding up of a partnership will often be coupled with the bankruptcy of the individual partners at the same time. If the partnership assets on their own are not sufficient to pay the creditors and meet the costs of the winding up, then inevitably the liquidator will pursue the individual partners for the shortfall.
Individual partners can also be held liable for fraudulent or wrongful trading, and can be disqualified as company directors for misconduct if the partnership was wound up.
What happens if an individual partner is made bankrupt?
If an individual partner is made bankrupt for a debt that is nothing to do with the partnership, then this will have the effect of dissolving the current partnership.
However, it is standard that the partnership will then ‘reform’ with the remaining partners taking on the same liabilities as the previous partnership. It just means that one of the partners will have ‘left’.
Whether new contracts will need to be set up with existing contractors following this dissolution and reformation will depend on the terms of those agreements. Some may already contain a term which allows for the contract to be with the partnership ‘as from time to time constituted’ and so is flexible. Inevitably a new partnership agreement will need to be signed following this dissolution though, or the default position is that the partnership is governed by the Partnership Act 1890. A well drafted partnership agreement will ensure there is no confusion if this situation occurs.
Limited partnership insolvency
A limited partnership is a highbred between a fully limited partnership and a general partnership. This means that there is at least one partner in the partnership who has personal liability for the debts of the partnership. The ‘limited’ partners have no liabilities for the obligations or debts of the partnership beyond the amount they put into the partnership, but equally they can take no role in the management or running of the partnership. If they do, their limited status is removed. The limited partnership role is usually for investors for example, who are unlikely to want to run the partnership on a day to day basis but want the power to oversee the partnership financial and other records.
A limited partnership must be registered at Companies House. If not, it will be considered to be a general partnership.
Limited partnerships can be subject to administration, voluntary arrangement, or winding up as we have seen with general partnerships. The bankruptcy of an individual partner will not however automatically dissolve a limited partnership.
LLP insolvency
An LLP is a separate legal entity like a limited company, and like a company director, the personal liability of a partner is limited to their investment into the partnership. They must be registered at Companies House and file returns that are available to be viewed at Companies House, like a limited company.
If the LLP members’ agreement allows it, LLPs can use all of the insolvency processes available to limited companies, such as:
Administration, Creditors Voluntary Liquidation, Compulsory Liquidation, Receivership, Company Voluntary Arrangement, Moratoriums and Restructuring Plans.
LLP partner liabilities
It is possible for an office holder in a standard insolvency process to bring an individual claim or claims against one or more LLP partners for recovery of money or assets in the same way that they can against individual company directors under the Insolvency Act, if they believe there has been some misconduct. It is also possible for an LLP partner to be disqualified as a company Director.
How can we help?
Partnership insolvency issues can be complex, and can be particularly onerous for individuals, depending on the partnership status.
At Harper James our insolvency lawyers have many years’ experience advising partners in financial difficulties, in particular if partners are facing personal claims against them by an office holder or are targeted for disqualification. If you are experiencing problems and are concerned about the future of your partnership contact one of our team today to discuss your options. The earlier you speak to a professional adviser, the more options remain open to you for recovery.
