53.61 Bankruptcy Order dissolvingpartnership
The making of a bankruptcy order against a member of a partnership will almost certainly dissolve that partnership. The provisions of section 33(1) of the Partnership Act (PA) 1890 provide: "Subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner." (See paragraph 53.67 regarding the effect of a winding up order against a corporate member.) In reality, certainly as regards large, long - standing partnerships, what will happen is that the partnership business will be preserved, the trustee being paid for the bankrupt’s interest in the partnership and partnership agreements will usually seek to achieve this. Technically, the old partnership will have been dissolved and a new partnership begun, less one member.
Notes: [s33(1) PA 1890]
53.62 Valuation of bankrupt’s interest where partnership solvent
Where immediately prior to the making of the bankruptcy order the bankrupt was a member of a solvent partnership, all that vests in the trustee is the insolvent partner’s share in the partnership. That share is subject to the rights of the other partners, including the right to have the partnership property used to discharge the debts and liabilities of the partnership (this is sometimes called the partnership lien). The trustee will not be paid out until the partnership debts have been paid and accounts between the partners settled. The solvent partners cannot insist on buying out the insolvent partner’s share at a valuation unless the partnership agreement so provides. In the absence of such a clause, the value of the bankrupt’s share will be ascertained following the sale of the assets of the partnership and the application of the proceeds in accordance with the provisions of section 44 PA 1890. Section 42 of that Act provides for the payment of a share of the profits to the outgoing partner or his estate if the business is carried on after dissolution or alternatively, at the option of the outgoing partner or his representative (in this instance the official receiver as trustee), interest at 5% per annum on the value of his share of the partnership assets. This provision does not apply where the partnership agreement grants an option to purchase the share. But failure to comply with the terms of the option allows a claim for a share of profits/interest.
Notes: [s44 PA 1890][s42 PA 1890]
53.63 Forfeiture clauses
It has been held that a forfeiture clause in a partnership agreement, whereby the bankrupt partner’s share is forfeit to the other partners on bankruptcy, may be a fraud on bankruptcy law. Any attempts to rely on the existence of such a clause should be resisted and if the remaining partners persist in their claim, the matter should be referred to Technical Section.
Notes: [Whitmore v Mason (1861) 2 John andH204]
53.64 Bankruptcy order against partner - contact with partnership creditors - no WUO against partnership
As partners are jointly and severally liable for partnership debts, the official receiver should send out notice of the meeting or notice of no meeting to all the partnership creditors. However, where the official receiver is satisfied that the partnership creditors will be paid by the new partnership/the solvent partners, he should consider applying to the court under rule 6.77 to relieve him of the requirement to report to the creditors.
Notes: [R6.77]
53.65 Partnership debts incurred after date of bankruptcy order
As the bankruptcy order, by operation of law, if there is no agreement to the contrary, dissolves the partnership, the bankrupt cannot be held liable for partnership debts incurred after that date.
Note: [s37 PA 1890]
53.66 Bankruptcy order against only general partner of a limited partnership with assets
Limited partnerships are described at paragraph 53.4. A limited partnership by its very nature cannot continue in the absence of a general partner and on the bankruptcy of its only general partner it is determined. Where the partnership is insolvent and there are assets to be dealt with, the official receiver should consider applying to the court pursuant to article 14 of the IPO for the court to make an order regarding the administration of the limited partnership’s estate. Notice of the application should be served on any limited partner with a short covering letter explaining that the purpose of the application is to regularise the administration of the insolvent partnership estate. Putting the limited partner on notice will give him the opportunity to step in and make an application to the court pursuant to section 6(3) Limited Partnerships Act 1907 for the court to consider whether the limited partner should deal with the partnership estate.
53.67 Winding up order against corporate member
The Partnership Act 1890 does not provide for a partnership to be automatically dissolved on the making of a winding up order against one of its corporate members. However, the making of the order would appear to enable a partner to apply to the court for dissolution on the grounds that "circumstances have arisen which, in the opinion of the court, render it just and equitable that the partnership be dissolved". A partnership agreement may specifically provide for dissolution on the winding up of a member. It may further provide how the member’s interest in the partnership should be valued and paid out. It is possible that the agreement may provide that on the winding up of a member the share of the partnership attributable to the relevant corporate partner will be divided between the remaining partners. Such a provision may be rendered void by section 127 of the Insolvency Act 1986, but if all the corporate partners were solvent at the time the agreement was entered into and there was proven commercial justification for its inclusion, then it may be binding. In the event that this situation is encountered, the official receiver should obtain a copy of the agreement and copies of the accounts of the corporate members. Creditors should be informed of the position and be given an opportunity to fund the obtaining of legal advice and/or the nomination of an insolvency practitioner liquidator to enquire into the matter. As a general rule, where a winding up order is made against a corporate partner, the official receiver should request the solvent partner/s to buy the company’s interest in the partnership; as to the position of bankrupts, see paragraph 53.61.
Notes: [s.35(f) P.A. 1890]
53.68EA Trustee/ liquidator’s right of access to records of solvent partnership
The trustee or liquidator of a member has no right to retain the records of a solvent partnership of which the insolvent is/was a member. However, the official receiver, as trustee or liquidator, should require the solvent member/s to provide him with proper accounts of the partnership trading and permit him to inspect the records. Access to the records will be necessary for example to establish that a fair price is being offered for the insolvent’s interest in the partnership or that a bankruptcy offence has not been committed (paragraph 53.104).Where the solvent partner/s refuse to permit the trustee/liquidator access to the partnership records, application may be made for the solvent partner/s to be summoned before the court and ordered to produce the records (see chapter 23 generally regarding private examinations).
Notes: [Ex parteStoveld (1823) 1GIJ. 303][s236(3); s366(1); R9.3]53.69 Closure of partnership business
Before the official receiver closes down a partnership business, he must be certain that either a winding-up order has been made against the relevant partnership, that joint bankruptcy orders have been made against all members of that partnership, or an order has been made by virtue of article 14. In the absence of any of these orders it is doubtful that the official receiver is empowered to deal with the partnership. In the absence of a winding-up order against the partnership and where there is at least one ostensibly solvent member of the partnership generally, dealing with its affairs should be left to that member and he should be required, in writing, to account for the value of the insolvent member’s interest in the partnership (but see paragraph 53.78). The exception to this is where it is impractical for petitions to be presented against all members, for example where a member of the partnership cannot be traced and cannot join in with the presentation of members’ petitions (article 10, IPO) or a joint members’ petition (article 11, IPO). As with the closing down of any business, where there is any doubt as to the identity of the trader confirmation should be sought by requesting sight of:-
the partnership agreement
annual accounts,
bank statements,
VAT registration certificate,
creditors’ invoices/statements,
sales invoices/books.
If doubt still exists, the case should be discussed at assistant official receiver/official receiver level before any action is taken as regards the business. Ideally, a business should not be closed down without a least one member of the partnership being present. (See chapter 8 generally regarding the carrying out of an inspection).
Notes: [articles 11 and 14, IPO] [Sch 6, Para 2 IPO (new s124(3)); Sch 7, Para 4 IPO (new s266(1)) IPO]
53.70 Employment Rights Act 1996
A partnership is not recognised as an insolvent employer under section 183 of the Employment Rights Act 1996; it is the partners who are regarded as the employers. As a result where a partnership is wound up as an unregistered company and there are no insolvency orders against the members, the employees of the partnership will not be able to obtain payment in respect of arrears of pay, payment in lieu of notice, etc from the Redundancy Fund pursuant to section 182 of the Employment Rights Act 1996. The employees of course remain at liberty to pursue these claims against the partners.
Notes: [articles 7 and9, IPO]
53.71 Realisation of partnership assets, vesting orders
A partnership is not a legal entity in England and Wales and therefore cannot own assets. The legal title to any assets "owned" by a partnership lies with the partners. Following on from this, the ability of a liquidator to give good title to a purchaser when selling assets of a partnership has in the past been questioned by prospective purchasers. This previously led to liquidators making applications to the court for orders directing that title to all or any of the partnership’s property vests in the liquidator. The granting of such orders has reassured purchasers that they are obtaining good title to the items purchased.
Notes: [s145]
53.72 Realisation of partnership assets, amendment to Schedule 4 to
To clarify the liquidator’s position the IPO has amended Schedule 4 to the Act. The amended Schedule 4 specifically states, for example, that, without sanction, the liquidator has power to sell any of the partnership property by public auction or private contract, with power to transfer the whole of it to any person. There should thus no longer be a need for vesting orders to be obtained.
Notes: the Act [Sch 3,Part II,Para 10; Sch 4,Part II,Para 30 IPO]
53.73 Realisation of partnership assets,
On the making of joint bankruptcy orders the official receiver becomes trustee of the separate estates and of the partnership estate. The assets owned by the partners and those attributed to the partnership immediately vest in the official receiver as trustee for the purpose of sale.
Notes: article 11cases [Sch 7, Para 11 IPO]53.74 Realisation of partnership assets, insolvency orders against all members but no winding-up order made or pending against insolvent partnership
Where insolvency orders have been made against all the members of a partnership, but there is no winding-up order against the partnership, other than in article 11, joint bankruptcy petition cases, the question arises as to what happens to the "partnership property"? The making of the insolvency orders is likely to have dissolved the partnership, if not previously dissolved, or have resulted in the partnership being dissolved (paragraphs 53.61 and 53.65). The methods by which the official receiver can gain the authority to deal with the partnership estate are set out in the following paragraphs (53.75 - 53.78 (inc)).
Note: [s33(1) PA 1890]
53.75 Application for consolidation and directions, bankruptcy orders against members, no winding-up order made or pending against partnership
Where bankruptcy orders have been made against more than one member of the partnership, the provisions of article 14, IPO provide that the proceedings may be consolidated by the court and further that the court may issue directions regarding the administration of the partnership estate. In practice, the official receiver should ensure that the partnership assets are protected from execution being levied against them and should consider making an early application to the court for the individual bankruptcy proceedings to be consolidated under one court reference number and for directions regarding the administration of the joint estate of the partnership. It should be noted that an application for consolidation alone will not draw the partnership estate into the proceedings.
53.76 Application for directions, bankruptcy orders (and/or winding-up orders) against members, no winding-up order made or pending against partnership
Article 14, IPO contains wide powers to make directions conferring on the court power to make an order as to the future conduct of the insolvency proceedings and to apply any provisions of the IPO with any necessary modifications which may include provisions as to the administration of the joint estate of the partnership and how it and the separate estate of any member are to be administered. Where bankruptcy orders and/or winding-up orders have been made against all members of the partnership the official receiver should apply for directions pursuant to article 14, IPO that the partnership assets be administered as if a winding-up order had been made against it by virtue of article 8 and as if the insolvency orders had been made by virtue of article 8 and that the proceedings be conducted in accordance with article 8, Schedule 4, Part II, IPO. Alternatively, directions could be sought that the partnership assets be administered as if the individual members had presented a joint bankruptcy petition by virtue of article 11, with all the provisions of article 11 and Schedule 7 applying to the administration of the various estates. These latter directions may be considered most appropriate where an application is also made for consolidation (see paragraph 53.75).
53.77 Ability of trustee/ liquidator of members to obtain a winding-up order against the partnership
The official receiver when trustee/liquidator of the estates of members of the partnership, is empowered by the provisions of article 7, IPO to present a petition for the winding up of the partnership. However, such action which would require an application for sanction to be made to the Secretary of State (Technical Section deals with such applications on the Secretary of State’s behalf) will rarely be made by the official receiver since this procedure is more costly than the alternatives outlined above and is to be recommended only in cases where there are sufficient assets to cover the costs of winding up and thus an insolvency practitioner is more likely to have been appointed trustee/liquidator. However, it should be noted that when making an application to the court as set out at paragraph 53.76, the court has direction to direct the official receiver instead to present a winding-up petition against the partnership. In such circumstances the court’s attention should be drawn, if appropriate, to the lack of funds available in the estates to cover the costs of the application and the official receiver’s concerns regarding the delays which the winding up procedure would involve prior to the assets being dealt with. If the court continues to direct the official receiver to present a winding-up order against the partnership, the official receiver should contact Technical Section without delay for advice on how to proceed. The making of a winding-up order against a partnership has the advantage that its assets are protected from execution being levied on them; in the absence of a winding-up order it is doubtful that such protection exists. Further, where all members of a partnership are bankrupt or in liquidation, there is doubt as to the power of their trustees/liquidators to deal with partnership property, particularly as regards land held by the partnership. The presentation of a winding-up petition is also an effective means of notifying partnership creditors of its winding up, which may be necessary where the partnership trading name does not consist of the names of the individual members. It should be noted that the preferential creditors of the partnership have preferential status as regards the assets of the partnership whether the partnership estate is the subject of a winding-up order or is drawn into the proceedings as detailed in this paragraph or paragraphs 53.75, 53.76 or 53.78.
Notes: [article 7,Sch 3 Part I, Para 3, IPO]
53.78 Application for directions, bankruptcy order against one member, no winding-up order made or pending against the partnership
Where a bankruptcy order has been made against one member of an insolvent partnership which has ceased to trade and the other members of the partnership are unable/unwilling to deal with the partnership assets, there is the facility for the official receiver to apply to the court to make directions (as at paragraph 53.76) to enable him to act. Notice of the application should be served on the "solvent" member/s. Where the "solvent" members consent to the application, written acknowledgement of this may be of assistance to the Court.
53.79 Winding-up petition outstanding against partnership, insolvency orders made against all members
Another situation where it will be necessary to consider seeking directions from the court is where insolvency orders have been made against all the partners but not against the partnership (itself) of which they are members, although a petition is outstanding against the partnership. The official receiver may need to consider whether to seek the appointment of a provisional liquidator or to seek some directions under article 14 regarding the handling of the partnership assets pending the hearing of the petition against it. It would appear that in the absence of directions, the official receiver has no power to deal with the partnership assets.
53.80 Insolvency orders made against all or some members and order against insolvent partnership
In a situation where insolvency orders have been made against a partnership and under the 1986 Act against its partners, it will generally be appropriate to seek directions under article 14 to have all the proceedings conducted under article 8.
Notes: [article 14 IPO]53.81 Exempt property
In the liquidation or winding up of a partnership there is no such thing as exempt (partnership) property, s283(2) being accordingly amended by the IPO. This fact should be firmly borne in mind when claims that items owned by the partnership such as cars and tools of trade are "exempt" are made. In order to clarify who owns what, reference should be made to, for example, the partnership accounts or the method of purchase of the item in question.
Notes: [Sch 4, Part II,Para 28;and Sch 7,Para 7, IPO]
53.82 Execution, general position
The position as regards execution has not been varied by the IPO (see chapter 9 generally regarding execution). Where a judgment is obtained against the name of a partnership, in addition to it being enforced against the partnership, it may be enforced, without leave, against those who acknowledged service as a partner or who, having been served as a partner, failed to acknowledge service or who admitted in pleadings that they were a partner or those who were adjudged to be partners. When judgment is obtained against several people as a partnership, a writ of execution must be issued against all of them, although it may be levied on any one (or more) of them. The sheriff may levy on the writ as he thinks fit and is not obliged to seize the goods of the firm first, looking to the assets of the members for any shortfall. The sheriff is perfectly at liberty to go where he thinks he is most likely to be able to satisfy the writ. Each of the members is liable for the whole of the debt and not just a proportion of it. A "nulla bona" return would not be appropriate unless neither the partnership nor all of its members possessed goods against which execution might be levied.
Notes: [RSC 1965 Order 81 r5][Abbot v Smith (1760) 2 Wm Blacks 949 and Herries v Jamieson (1994) 5TR556]
53.83 Execution; insolvency orders against all members of the partnership, no order against partnership
Where at the date of the making of insolvency orders against members of a partnership but where there is no winding-up order against the partnership an execution against partnership assets has not been completed or has been completed, but the proceeds have not been distributed, the question arises as to who is entitled to the goods/funds? Should the judgment creditor receive them in the normal course, there being no order against the partnership (in which event section 128 of the Act would apply), or may the official receiver claim them pursuant to section 346 of the Act? Departmental lawyer’s advice indicates that whilst there is no binding authority on the point, there are arguments which the official receiver may put forward in seeking to challenge the sheriff in an attempt to collect/protect the assets. The arguments relate to whether the creditor is a creditor of the individual members of the partnership and to the nature of the member’s interest in the partnership property. Reference should be made to Technical Section for further advice if this situation is encountered.
Where proceedings are brought against a partnership under the provision of articles 7 and 9 the fees payable are those applicable to winding-up proceedings. One deposit is payable on the presentation of the petitions (winding-up deposit). Proof of payment of this deposit is sufficient to enable a petition against an insolvent member to be lodged in court. The deposit is credited to the partnership (joint) estate. An administration fee is charged to each estate and a stationery fee is charged to each estate which has creditors. Any meetings fee is charged to the partnership estate. Gazette notices and newspaper advertisements should be placed and the charge/cost of this charged to the estate to which they relate. As far as joint bankruptcy petitions are concerned, one deposit is paid (bankruptcy) which is apportioned equally between the separate estates. An administration fee is charged to each separate estate and a stationery fee is charged to each estate which has creditors. Any meetings fee is charged to the joint estate. The gazette charge and the cost of the newspaper advertisement is divided equally between the joint and separate estates.
Notes: [Ss 414 and 415 articles 7 and 9, IPO][articles 8, 10 and 13, IPO][article 11, IPO]
On the presentation of petitions against the members and the partnership, only one deposit is payable, being that payable on the presentation of the petition against the partnership. In the event that the deposits which would have been payable on the orders subsequently made is less than that actually paid, the difference should be returned to the petitioning creditor.
Notes: of deposit on petition[articles 8,and 13,IPO]
Distinct accounts must be kept of the joint and separate estates showing all receipts of funds, the charging of fees and any payments made out of the estates. The expenses should be paid in priority to the creditors’ claims. No fees or remuneration should be charged in connection with the transfer of a surplus from a joint estate to a separate estate, a distribution from a separate estate to the joint estate or a distribution from the estate of a separate partnership to the separate estates of the members of the partnership (see paragraphs 53.88, 53.89 and 53.90).
Notes: [Sch 4, Part II, Para 23; Sch 7, Para 21, IPO] [s175(C) (8) as inserted by IPO at the above references]
Where realisations in the joint estate are insufficient to enable the expenses of that estate to be paid, the amount of the unpaid expenses should be divided equally between the separate estates and where there are sufficient funds these expenses will be paid after the expenses of the separate estates, but prior to the creditors’ claims.
Notes: unpaid expenses in joint estate[Sch 4,Part II,Para 23; Sch 7,Para 21, IPO]
53.88 Distribution; unpaid expenses separate estate
Where a separate estate is insufficient to pay its expenses, the unpaid balance becomes part of the expenses to be paid out of the joint estate., payable after the joint estate expenses.
Note: [Sch 4, Part II, Para 23; Sch 7, Para 21, IPO]
53.89 Distribution; joint/separate estate inability to pay expenses following transfer
If any estate is unable to pay the expenses to be paid out of it following a transfer of expenses to it (see paragraphs 53.84 and 53.85), the resulting debit balance on the estate should be divided equally between the other estates. This process should be repeated until the expenses are paid or, there being no funds available to pay them, the unpaid balance remaining should be divided equally between all estates.
Notes: [Sch 4, Part II,Para 23; Sch 7Para 21, IPO]
53.90 Payment of expenses; sanction of creditors committee/ application to court
In addition to the ability to transfer unpaid expenses between the estates to achieve payment (see paragraphs 53.84, 53.85 and 53.86), the official receiver may, with the sanction of the creditors’ committee or the leave of the court,
For example, such an application might be made where the trustee/liquidator of the partnership wishes to bring legal proceedings against a large book debtor and the joint estate does not have sufficient funds to finance the proceedings. The successful recovery of the book debt would ultimately reduce the trustee/lliquidator’s claim against the separate estates and as a result the creditors’ committee might be willing to sanction the payment of the legal expenses from the separate estate/s.
Notes: [Sch 4,Part II,Para 23; Sch 7, Para 21, IPO]
53.91 Payment of debts in the joint estate
The order of payment of debts in the joint estate is:-
A postponed debt is usually a loan the rate of interest on which varies according to the profits earned by the partnership; see sections 2 and 3 PA 1890 for a full definition. Any shortfall which remains after part payment of the debts (a) and (b) is then claimed by the liquidator/trustee proving in each of the separate estates for the full amount of the shortfall. The creditors of the joint estate are precluded from proving in the separate estates of the partners. It is accepted that the debts may only be paid once, but as each partner is liable for the debts a proof for the full amount is lodged against each separate estate by the liquidator/trustee of the partnership estate. The claim by the liquidator/trustee ranks equally for payment with the unsecured creditors in the separate estates. Any unpaid balance of a preferential debt in the joint estate is not preferential in the separate estates. The liquidator may also claim against each of the separate estates in respect of the liabilities c), d) and e). Such claims will rank equally for payment with like interest/debts applicable to the separate estates. Any dividend received by the joint estate from any separate estate shall be treated as an asset of the joint estate and is subject to the usual rules of priority from that estate. Where a surplus remains after the administration of the joint estate the liquidator/trustee should divide it between the members/their estates according to their interests in the partnership ie per the partnership agreement, according to profit/loss sharing ratios as shown in the accounts or otherwise equally between them.
Notes: [s2 and s3PA 1890][Sch 4, Part II, Para 23;Sch 7, Para 21, IPO][s2 and s3 PA1890][s9 PA 1890; s3 Civil Liability (Contribution)Act 1978]
53.92 Payment of debts general, separate estates
The order of payment of debts in the separate estates is:-
Any surplus balance on the estate should be returned to the member after the accounts have been audited. Where the member is a company the surplus should be returned to the contributories following settlement of a list of contributories and audit of the accounts (see paragraph 53.92 regarding the settlement of a list of contributories). It is, however, unlikely that there will be a surplus on a separate estate as it is likely that any well-funded separate estate will bear the burden of paying expenses/debts arising against the joint estate as well as expenses/debts in other separate estates, which may have been transferred to the joint estate.
Notes: [Sch 4,Part II,Para 23; Sch 7, Para 21, IPO][s2 and s3 PA 1890]
53.93 Inclusion of separate partnership in the proceedings
Where insolvency orders have been made against all/ some of the members of a partnership it is possible that two or more of those members may comprise a separate partnership. The creditors of this partnership should be treated as a separate set of creditors subject to the same statutory provisions as the separate creditors of any member of the lead partnership, ie as a separate and not a joint estate with regard to its relationship to the lead partnership. Consideration will need to be given by the official receiver to gaining the authority to deal with this partnership’s assets (see paragraphs 53.75 and 53.76). Any surplus remaining on the estate of the sub-partnership after the payment of expenses and debts should be divided between the estates of the members of that partnership according to their rights and interests in it.
Notes: [Sch 4,Part II,Para 23; Sch. 7,Para 21, IPO][Sch 4, Part II, Para 23; Sch 7, Para 21, IPO]
53.94 Pursuing partners as contributories - introduction
Where a partnership is being wound up as an unregistered company the official receiver as liquidator should consider requiring any ostensibly solvent members of the partnership, ie those without current insolvenvy orders against them, to contribute to paying the deficiency owed by the partnership, ie the shortfall of assets over the debts, and where realisations are insufficient to cover the expenses of the winding up, then payment in respect of the expenses should also be sought. Members of the partnership or representatives of members (corporate partners) should be informed when they attend for interview that they are likely to be called upon to contribute towards the payment of the debts of the partnership and the expenses of winding up. If possible some idea of their ability to pay should be obtained at interview, when they attend to provide information regarding the partnership’s affairs. But care should be taken regarding asking direct questions about a solvent member’s affairs as the official receiver has no appointment over them. They should be reminded that they are liable as they have not traded with the protection of limited liability and that failure to pay could ultimately result in insolvency proceedings being brought against them. It should be noted that the partnership creditors retain the right to pursue the solvent members regarding the partnership debts.
Notes: [s226]
53.95 Pursuing partners as contributories - procedure
The pursuit of partners as contributories generally should not be undertaken by the official receiver but should be left to insolvency practitioner liquidators to deal with. However, there may be occasions where there are no funds in the estate, to attract the appointment of an insolvency practitioner liquidator and the official receiver wishes to pursue the partners as contributories, the procedure is as follows. Firstly, a list of contributories must be settled. Section 148 provides for the list of contributories to be settled by the court. However, by virtue of the rules, the court’s duty in this respect is delegated to the liquidator and in the ordinary course it will not be necessary for the court to become involved. There is, for example, no legal requirement for a copy of a settled list of contributories to be filed at court. The list will state the names and addresses of the contributories and the extent of their liability. As members of a partnership are jointly and severally liable regarding monies owed by the partnership, this column should state that they are each liable for "the whole of the partnership debts and liabilities and the expenses of its winding up". A limited partner will only be liable to the extent of any agreed contribution which has not been paid.
Notes: [s148][R 4.195 and 4.196][Form R 4.197][s9 PA 1890 and s3 Civil Liability (Contribution) Act 1978][s4 LPA 1907]
53.96 Pursuing partners as contributories - service oflist of contributories
Whilst lists of contributories should be settled fairly early on in the proceedings, it is important that as accurate an estimate as possible is obtained, for example where assets have not yet been realised an agent’s valuation should be obtained; also cashiers should be requested to provide an estimate of the costs. The settled list of contributories should be sent out to each solvent member under cover of Form L80.07. This form notifies the contributories that they may be called upon to contribute towards payment of monies owed by the partnership and the expenses of winding it up. The form further notifies them that they have 21 days within which to object to any entry in the list.
Notes: [R 4.198]
53.97 Pursuing partners as contributories - objection to settled list
If an objection is received the official receiver as liquidator must respond within the following 14 days stating either that the list has been amended and disclosing how it has been amended or that he declines to amend the list as he considers the objection is not well founded. The liquidator’s notice to the objector on Form L80.09 shall inform the objector that he is able to apply to the court for variation of the list within the following 21 days. The official receiver will not be personally liable for any costs regarding an application to the court pursuant to rule 4.199.
Notes: [R 4.198][R 4.199][R 4.201]
53.98 Pursuing partners as contributories - offer of payment
Where an offer of payment is received the official receiver should consider obtaining the appointment of an insolvency practitioner as liquidator to collect and distribute the funds. An offer to pay should not be rejected out of hand just because it does not represent the total originally asked for. The amount offered may for example be in accord with the profit/loss sharing ratios as evidenced in the accounts or in accordance with the partnership agreement. It is submitted that the official receiver could not be criticized by the creditors for agreeing to such an amount. However, where the appointment of an insolvency practitioner is to be sought, such agreement should be left to him. The sanction of the liquidation committee would be needed to enable the liquidator to agree a compromise regarding the amount owed by a contributory.
Notes: [Sch 4 to theAct as amendedby Sch 3,Part II,Para 10; Sch 4, Part II,Para 30, IPO]
53.99 Pursuing partners as contributories - no offers received
Where no offers are received, efforts by The Service’s debt collector have proved abortive and the estate is without funds to pursue the contributories, creditors should be circulated and asked whether they are prepared to fund action against the contributories. If they are willing to fund such action the appointment of an insolvency practitioner as liquidator should be sought. The insolvency practitioner is then likely to make a formal call on the contributories to pay. The procedure for this is set down in rules 4.202 to 4.205 (inclusive), failure to pay a call may then result in insolvency proceedings being brought against the contributories. If the creditors are not prepared to fund an action, the matter should be dropped.
Notes: [R 4.202-4.205]
53.100 Annulment - application made by one member of partnership
What are the repercussions if one member of a partnership applies for the annulment of the bankruptcy order made against him on the grounds of payment in full? Where a partnership is subject to insolvency proceedings and its assets are insufficient to enable the expenses of winding up and its debts to be paid, each insolvent partner is liable to pay the unpaid expenses and the debts in full (paragraphs 53.87, 53.88). This commitment must be honoured to enable an annulment on the grounds of payment in full to be achieved. In the event that a partnership is not subject to insolvency proceedings, the partnership creditors have the choice of pursuing the partnership or the individual partners for payment as the partners are jointly and severally liable for the partnership debts. Where the partnership is one of straw, the creditors may seek to prove in the bankruptcy proceedings and such debts will need to be paid to achieve an annulment of the bankruptcy order. The onus is on the bankrupt to disclose any outstanding partnership debts. If the bankrupt fails to disclose any provable debt(s) the creditor(s) retains the right to cause fresh bankruptcy proceedings to be issued (see chapter 6 generally regarding annulment). Similar considerations, to those above, apply where an application is made to stay or rescind a winding-up order which was made against a corporate member.
Notes: [s282(1)(b)][s9 PA 1890s3 CivilLiability(Contribution)Act 1978]
53.101 Descriptions at date of insolvency order
Urgent consideration should be given to applying to the court to vary a winding-up order or bankruptcy order description, prior to gazetting or advertising the making of the order, where such publicity could adversely affect a continuing business. Businesses most likely to be affected include public houses, hotels and restaurants where the trading style often remains the same despite a change of proprietor. Insolvency order descriptions should be varied where necessary so that they clearly state that the partnership "formerly traded as .... and ceased to trade on ....". An early application for variation of the description along these lines will protect the official receiver from a claim for damages in respect of adverse publicity.
53.102 Partnership voluntary arrangement (PVA)
As stated at paragraph 53.53 the IPO introduces the concept of a partnership voluntary arrangement, the procedure for which follows that for a company voluntary arrangement. There is no provision for an interim order to be made as is the case with an individual voluntary arrangement and as a result there is no protection from creditor action whilst a proposal is put together. As the partners are jointly and severally liable for the partnership debts it is unlikely that a PVA will succeed, in the absence of voluntary arrangements proposed by its members, without a substantial financial contribution being made by one or more of the members. Article 5 confirms that Part 1 of the Act may apply to corporate members and Part VIII to individual members thus enabling members of a partnership to enter into voluntary arrangements. It should be noted that where the partnership is being wound up as an unregistered company or an order has been made pursuant to article 11, it is the liquidator/trustee who is empowered to propose a voluntary arrangement, not the members. Where a voluntary arrangement is operating prior to the making of a winding up order against a partnership and the liquidation proceedings are brought pursuant to article 8, the court may appoint the supervisor as liquidator on the making of the winding up order. Such a direct appointment is not possible in articles 7, 9, 10 or 11 cases (see paragraph 53.73 regarding article 11 cases; also see chapter 20 generally regarding voluntary arrangements).
Notes: [article 4,IPO][s9 PA 1890;s3 CivilLiability (Contribution) Act 1978][article 5, IPO] [article 4, IPO] [s140(3) as amended by Sch 4, Part II, Para 15, IPO]
53.103 Disqualification
As has previously been mentioned (paragraph 53.54), disqualification proceedings may be taken against partners where the partnership has been wound up as an unregistered company. Disqualification proceedings may be taken against a member of the partnership regarding his conduct in the partnership alone or his conduct in previous partnerships and/or companies may also be taken into account. If a disqualification order is made against a member he is disqualified from being a director, etc of a company but may be a member of a partnership or a sole trader. This state of affairs is similar to that where an undischarged bankrupt is by virtue of being a bankrupt unable to be a director of a company or have certain other involvements in a company. He is not prevented from trading in a partnership business or on his own account but there are significant restrictions on him.
Notes: [article 16,IPO]Company Directors DisqualificationAct[s1 CDDA 1986]
It should be noted that where a bankrupt has been a member of a partnership bankruptcy offences could be alleged. As in the case of a company, care should be taken to establish the responsibilities of the partners. For example, if the accounting records are falsified it is important to know who was primarily responsible for ensuring that the accounting records were entered. Reference should be made to Volume 2 of the Technical Manual generally regarding the commission of offences.
The Enterprise Act 2002, Section263 repealed the following bankruptcy offences:
section 361 (offence of failure to keep proper accounting records), and
section 362 (offence of gambling and speculation)
Notes: [ss 353-360(inc)]
[Back to Part 2 - The Insolvent Partnerships Order 1994]