There are several types of partnership and much of the insolvency legislation that applies to companies also applies to partnerships. For a general partnership (not a limited partnership), this means that they can enter into a partnership voluntary arrangement (PVA).
In this article, our insolvency solicitors explain what a partnership voluntary arrangement is, the process and how long a partnership voluntary arrangement lasts.
Contents:
- What is a partnership voluntary arrangement?
- How can a partnership enter a voluntary arrangement?
- What is the moratorium, and who can use it?
- When is a partnership be eligible for the moratorium?
- What is the process?
- How is the partnership voluntary arrangement monitored?
- What is the benefit of having a partnership voluntary arrangement and how does it work?
- How long does a partnership voluntary arrangement last?
- Can a creditor object to a partnership voluntary arrangement if they don’t want to be bound by it?
- How can we help?
What is a partnership voluntary arrangement?
A partnership voluntary arrangement is a contractual compromise reached by the partnership with the partnership’s creditors, and is often sold to creditors as a better option for them than the partnership having to go into a formal insolvency process such as liquidation or administration. Inevitably, with a partnership voluntary arrangement, while creditors will be asked to agree on a reduction in the amount that will be paid to them, this is usually assisted by a cash injection for the benefit of the partnership voluntary arrangement, or some other incentive. This will mean that creditors are likely to be paid more than the alternative, where they will get only minimal or no pence in the pound.
The creditors affected, who are generally the unsecured creditors, will be invited to vote on the proposal, and if their vote is passed, all unsecured creditors at the date of the agreement are bound by this.
Unlike a limited company or limited partnership, general partners are also equally personally liable for the debts of the partnership. It is often the case that when proposing a partnership voluntary arrangement, the partners individually should also propose individual voluntary arrangements (IVAs) personally, to ensure they are fully protected.
How can a partnership enter a voluntary arrangement?
The partners will need to first agree that they wish to enter a partnership voluntary arrangement. They must engage an insolvency practitioner (IP) to assist, who will help them prepare the proposal that will be put to creditors.
That insolvency practitioner will initially be called the Nominee.
What is the moratorium, and who can use it?
If the partnership meets the eligibility criteria it can have the benefit of a 28-day moratorium while the partnership voluntary arrangement proposal is being considered.
A moratorium provides a breathing space for the partnership to allow it to put the partnership voluntary arrangement proposals to creditors without the threat of legal proceedings being brought during this period. If the partnership is eligible for a moratorium, then during this time no creditor or other party can present a petition for winding up, or call a meeting of members of the partnership, or put the company into administration or receivership.
No creditor can take any step to enforce security over partnership property, or take back goods, or take any legal process against the partnership, including the exercise of rights of forfeiture by the landlord without making an application to the court.
When is a partnership be eligible for the moratorium?
Only what are considered to be small/medium partnerships can use the moratorium. This means that the partnership has to comply with at least 2 of the following conditions to take the benefit of a moratorium:
- Turnover cannot be more than £5.6m;
- There are no more than 50 employees, and/or
- They cannot own assets exceeding £2.8m.
A partnership can’t use the moratorium if they are already in a formal insolvency process (such as administration or liquidation or similar) or if they have already used a moratorium in the last 12 months.
What is the process?
The proposal for the arrangement, together with a statement of the partnership’s financial affairs are provided to the Nominee, who must then confirm to the court and the partners that the proposal has a reasonable prospect of being approved and is likely to succeed on current information.
The shareholders must then file with the court all of this documentation, together with the appropriate fee if they wish to have the benefit of the 28 day moratorium.
If they don’t apply for a moratorium, the partners must still provide a copy of the proposal and a statement of financial affairs to the Nominee who must report to court to say whether they believe the proposals have a reasonable prospect of being approved by creditors.
The Nominee might make suggestions for modifications if they don’t believe the proposal is reasonable. They will then arrange for a meeting of the partnership to approve the partnership voluntary arrangement proposals, with or without suggested modifications. If all is agreed, the Nominee will then ask creditors to decide if they approve the proposals. All unsecured creditors will be invited to vote.
The proposal will only go through if 75% of value of unsecured creditors vote for it, and no more than half of the value of unconnected creditors have not voted against it.
If the proposal is voted through, then all unsecured creditors are bound, even if they voted against it. The result must then be reported to the Court and to all creditors.
Secured and preferential creditors are not bound by a partnership voluntary arrangement unless they expressly agree to be.
How is the partnership voluntary arrangement monitored?
The Nominee becomes the Supervisor once the partnership voluntary arrangement is voted through. The Supervisor will monitor and check that the partnership voluntary arrangement is complying with its terms, and if not, will take the necessary action, as agreed in the terms of the partnership voluntary arrangement document. This may involve moving the partnership to liquidation if it fails to meet the terms of the partnership voluntary arrangement and pay creditors.
Every 12 months, the Supervisor must prepare an annual progress report and send it to the court, creditors and partnership members.
What is the benefit of having a partnership voluntary arrangement and how does it work?
The main benefit of a partnership voluntary arrangement for a partnership is that the partners can continue to trade and remain in charge. All creditors bound by the partnership voluntary arrangement are unable to take legal proceedings against the partnership for the sums owed under the partnership voluntary arrangement (but they can for later sums that accrue, so partners need to be aware of this).
The partnership voluntary arrangement allows the partnership to survive having agreed to pay their creditors less than full value, and the creditors are more likely to be paid a specific sum that is better than if the partnership were forced into insolvency and fire sale.
How long does a partnership voluntary arrangement last?
The length of the partnership voluntary arrangement is set out in the partnership voluntary arrangement agreement. There is no set time in law. This will depend on what is reasonable for the partnership and for the creditors. The sooner it can be completed the better for all, but it must be realistic. If it is overly optimistic in terms of how much can be paid, and over what period, it is likely to fail, and all parties will be back to square one, having expended time and money in putting the partnership voluntary arrangement in place.
Can a creditor object to a partnership voluntary arrangement if they don’t want to be bound by it?
It is only possible for an aggrieved creditor to object to a partnership voluntary arrangement for certain reasons, and the creditor will need to ask the court to decide on this. A challenge must be made within 28 days of the implementation of the partnership voluntary arrangement, or 28 days from when the creditor became aware of it.
A partnership voluntary arrangement can only be challenged if it is ‘unfairly prejudicial’ to a particular creditor, or if there was a ‘material irregularity’ in relation to the process surrounding the partnership voluntary arrangement.
How can we help?
Partnership insolvency issues can be complex and are complicated by the fact that individuals can be liable for partnership debts as well as the partnership. A partnership voluntary arrangement can be a very effective way of staving off formal insolvency while the partnership has some breathing space to recover from a trading issue. The prospects of success of the partnership voluntary arrangement need to be assessed fully to avoid the partnership voluntary arrangement ultimately failing, which will personally affect the partners, as well as making the situation worse for creditors.
At Harper James our insolvency lawyers have many years’ experience advising partners in financial difficulties on their options. If you are experiencing problems, contact one of our team today to discuss.
