Dissolution of a partnership

Generally death, bankruptcy or retirement brings a partnership to an end59. However in 2003, a report by the Law Commission60 recommended that so long as two partners remain the business should be allowed to continue61. This rule now applies unless the partnership agreement provides otherwise62. This relates to the dissolution of a partnership which Archie and Bob may have to undertake now that Catherine has decided to leave. Dissolution is the ending of a partnership and can arise by death, bankruptcy or retirement of a partner63. There are two types of dissolution, a general dissolution and a technical dissolution64.

In certain circumstances the partnership may be dissolved and reformed by the remaining partners; however this is subject to the partnership agreement65. If a partnership agreement states that the partnership shall continue after death, bankruptcy or retirement then a technical dissolution will occur66. If there is nothing in the agreement as to the partnerships status then a general dissolution will occur67. This can be illustrated by the case of Winter v Winter68. The effect of a general dissolution is that the entire partnership comes to an end, with a technical dissolution the firm is dissolved and reformed under the remaining partners69.

Archie and Bob now have two options, a technical dissolution or a general dissolution. If the partnership agreement allows for continuation after a death or retirement then the firm can be reformed by Archie and Bob however three criteria must be complied with. Firstly it is for Catherine to take steps to avoid future liability for partnership debts70. Under the provisions of section 37 PA 189071 a departing partner must inform all existing clients of their departure and put notice to that effect in the London Gazette to inform any potential clients72.

Secondly Catherine's interest in the firm must be purchased73. Section 43 PA 189074 states that an outgoing partner's interest is a debt due to him from the remaining partners75. The Law Commission proposed that an outgoing partner should be bound to transfer his interest to the remaining partners however it must be stated in the partnership agreement how the interest will be purchased76. Finally Catherine's right to profits made between the date of retirement and the date the interest is purchased must be determined77.

Section 42(1) PA 189078 provides that a departing partner can either opt for a share in the profits between these times or opt for 5% interest to be paid on their share per annum, again this is subject to the partnership agreement79. However if the partnership agreement does not identify the status of the partnership after death or retirement then a general dissolution will occur. If this is the case then the firm would need to be wound up which includes collecting and valuing assets, settling partnership debts and distributing any surplus80. Again three steps must be undertaken.

Firstly it must be decided who will wind up the business, the partners themselves or a receiver appointed by the court81. The most common way to wind up is by an existing partner. It is cheaper, quicker and conducted more privately82. Under section 38 PA 189083 there is a duty to wind up the business and complete any unfinished transactions84. A failure to do this may result in actions for negligence by third parties85. This will apply unless a court orders otherwise and appoints a receiver to conduct the winding up process86. If a receiver is appointed they are the only person entitled to act on behalf of the firm87.

Secondly it must be determined whether there are any premiums that need to be returned to the partners88. A premium is a joining fee paid to allow someone to become a partner for a specified time89. If a firm is dissolved prematurely, under section 40 PA 189090 the premiums may, in part, need to be returned91. Finally the partner's rights to the firm's assets must be established. Under section 39 PA 189092 every partner is entitled, once partnership debts have been paid, to a share of the surplus93. Following this it is likely that Archie and Bob would undertake a technical dissolution.

As they wanted to be able to retire from the partnership and be able to purchase an outgoing partners interest it is likely that the partnership agreement would provide for the continuation of the firm in the event of a death, bankruptcy or retirement. Catherine now needs to avoid her liability for future debts by informing both existing and potential clients of her departure, Archie or Bob will be required to purchase Catherine's interest in the firm and her right to a share of the profits must be determined. Once this has been complied with the partnership will be reformed under Archie and Bob.

Question three Generally death, bankruptcy or retirement of a partner brings the partnership to an end94 however, the Law Commission, in a report in 200395, recommended that so long as two partners remain the firm should be allowed to continue96. Although this rule now applies, in this situation there are only two partners, Archie and Bob, who have decided to go their separate ways and where only one partner remains to carry on a business there is a necessity to dissolve the partnership97. This means that a general dissolution must occur bringing the partnership to an end98.

The next step is to wind up the business which involves collecting and valuing partnership assets, settling partnership debts and distributing the surplus99. To wind up the partnership it must be decided who will carry out the winding up process100. This can either be by a partner who, under section 38 PA 1890101, must complete all unfinished transactions102, or by a receiver appointed by a court to manage and supervise the process103. If a receiver is appointed they are the only person authorised to act and commence proceedings on behalf of the firm104. Next any premiums paid must be returned to the partners105.

A premium is a joining fee paid to become a partner for a certain period of time106; this comes from section 40 PA 1890107. Finally it must be determined what rights each partner has to the firm's assets108. Under section 39 PA 1890109 each partner is entitled, after all debts have been paid, to a share of the surplus110. Once it has been decided who will conduct the winding up, any premiums have been returned, all debts have been paid and any surplus distributed between the former partners, the partnership will be wound up and be dissolved meaning it no longer exists.

However it may be possible for either Archie or Bob to buy out each other instead of winding up111. This may be ordered by the court are known as a Syers v Syers orders112 which come from Syers v Syers113. If this was to occur it is likely that Archie would buy out Bob and continue to trade as a sole trader. This means that a technical dissolution may occur which, in accordance with the partnership agreement, allows the business to effectively continue114. If this is the case then notice must be given to existing clients to notify them of the change and a notice to that effect in the London Gazette for potential clients115.

Archie would then need to purchase Bobs interest in the business and establish his right to the profits116. However since a partnership must be dissolved where only one person remains to carry on a business117, it is likely that the partnership will be dissolved. Archie and Bob could then go their separate ways and establish there own sole trader businesses.

Bibliography

Keenan, D & Bisacre, J. Company law, 13th Pearson Longman 2005 Morse, G. Partnership Law, 6th Oxford University Press 2006