Partnerships

Partnerships

July 2008

Introduction

This chapter provides additional guidance specific to distributions in partnerships.

For further guidance on the procedure for distributing funds to creditors see Case Help Manual part : Distributions: - Bankruptcy & Companies.

For further information on partnerships generally see Case Help Manual part : Partnerships.

i How does the new financial regime affect distributions?

On 1 April 2004, the Insolvency Service's new financial regime came into force which introduced a new, simpler fee structure. Under The Insolvency Proceedings (Fees) Order 2004 the official receiver may charge general remuneration based on a time and rate basis, as set out in the Insolvency Regulations 1994, for the activity of distributing funds to creditors. This is applicable to all distributions made on or after 1 April 2004 whether the insolvency order was made pre or post 1 April 2004 but does not include the time spent on returning the petition deposit or payment of the petitioning creditor's costs.

Previously the official receiver charged a distribution fee (i.e. a percentage of funds distributed) as set out in The Insolvency Regulations 1994 (as amended). The Insolvency Proceedings (Fees) Order 2004 (as amended) revokes the distribution fee for all cases.

These provisions apply equally when distributing funds in bankruptcy, company or partnership cases.

ii What is a partnership?

Section 1 of the Partnership Act 1890 defines a partnership as “the relation which subsists between persons carrying on a business in common with a view of profit”.

Under the law of England and Wales a partnership is not a separate legal entity from its members and each partner can sue and be sued personally as well as in the name of the partnership. Creditors can choose to pursue one or more of the partners personally, rather than pursue the partnership, for partnership debts.

iii What are the main differences between a partnership and a company?

A general partnership does not generally provide its members with any limited liability; each partner is liable without limit for debts incurred by the other partners in the course of the partnership business. There is no system for registering ordinary partnerships with the Registrar of Companies.

A company may be a corporate member of a partnership; indeed a partnership may be comprised solely of limited companies.

iv How can a partnership be wound up?

The Insolvent Partnerships Order 1994 provides five routes by which a partnership may be wound up as follows:

Winding it up as an unregistered company without any petitions against the members or former members. The petitioner is either a creditor, a “responsible Insolvency Practitioner” or the Secretary of State (Article 7 of the Insolvent Partnerships Order 1994).
Winding it up as an unregistered company with petitions against one or more of the members or former members. Petitioner is a creditor (Article 8, IPO1994).
Winding it up as an unregistered company without any petitions against the members where the petitioner is a member of the partnership (Article 9, IPO1994).
Winding it up as an unregistered company with petitions against all the members. Petitioner is a member (Article 10, IPO1994).
Joint bankruptcy petition by the members without the winding up of the partnership as an unregistered company; although the order gives the trustee of the bankruptcy estates authority to wind-up the affairs of the partnership (Article 11, IPO1994).

v Estate Accounting

A joint account is opened for the partnership itself and a separate estate account is opened for each member showing all receipts of funds, the charging of fees and any payments, or transfers, made out of the estate.

The differences for dealing with deposits and the administration fee for partnerships and partners are set out below:

	‘Ordinary’ Partnerships	Article 11 Partnerships (Form 16)
Distinguishing features	WUO against partnership with or without BO against any individual partner or WUO against any corporate partner. All separate court numbers	Joint bankruptcy order against every partner, trustee of partners’ estates acts as trustee of partnership. No WUO against partnership. All under same Court number. (A joint estate account and separate estate accounts must be opened.) *
Deposit	One deposit applied to the partnership estate.	One deposit apportioned between each partner’s (separate) estate - not to the joint estate.
Administration Fee	Charged to any separate estate and to joint estate.	Charged to each partner’s estate - not to the joint estate

*Although no bankruptcy order is made against the joint estate as such, a joint estate account will have to be opened.

The provisions of sections 175(1) and 328 IA86 (as modified) apply in a case where article 8 of IPO94 applies (see paragraph iv point 2 above), as regards priority of expenses incurred by a responsible insolvency practitioner, which includes the official receiver of an insolvent partnership and of any insolvent member of that partnership against whom an insolvency order has been made. See Technical Manual Chapter 36 part 7 paragraphs 36.137-138 for further information.

vi Priority of expenses

All insolvency expenses must be paid in full before any creditor can be paid. The Insolvent Partnerships Order 1994 has modified certain sections of the Insolvency Act 1986 relating to the priority of debts and expenses when dealing with the winding up of a partnership with concurrent bankruptcy or winding-up orders made against one or more of its members. The expenses are paid as follows:

First, the joint estate of the partnership bears the joint expenses and each separate estate bears its own expenses.
Any unpaid balance of expenses on the joint estate is apportioned equally between the separate estates.
Any unpaid balance of expenses on a separate estate forms part of the expenses to be paid from the joint estate.
Thereafter, any unpaid debit balance on any estate is further apportioned equally between the other estates.
Thereafter the total of all remaining unpaid debit balances are again further apportioned equally between the other estates.

This continues until the expenses are paid in full or there are no funds available to pay the expenses; in which case the unpaid balance is apportioned equally between all the estates.

(See Technical Manual Chapter 36 part 7 paragraph 36.137)

If an estate has a credit balance remaining after all functions have been performed a payment from that particular estate may be made to the creditors.

The above rules do not apply when dealing with the winding up of a partnership with no concurrent petitions against a member because there is only one estate.

In certain circumstances, for example where there are ‘independent’ insolvency orders against the partnership and one or more partners, the consolidation of the cases under Article 14 might prove to be financially advantageous (in the payment of otherwise unpaid expenses). See Case Help Manual part : Consolidations for information and guidance.

vii Payment of petition costs

With the exception of joint debtors’ petitions, the petition deposit is posted to the partnership (joint) estate and therefore the payment of any petition costs would be repaid from/made from that estate. Following the accounting rules referred to above, these costs must be paid before a distribution can be made from a separate estate. In cases where the petitioner is a member of the partnership, or in a joint debtors’ petition, no re-imbursement is required to cover costs as it is likely that they would have been met when the petition was presented. Generally, there are no petition costs involved in a joint debtors’ petition case.

viii Debit balances

Where there is a debit balance on the joint estate, the amount unpaid should be divided equally between the separate estates. The transferred balance forms part of the separate estate’s expenses and as such, where there are sufficient funds will rank equally and become payable at the same time as the expenses of the separate estates. Similarly, 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 at the same time as the joint estate expenses.

For an example of how this works see LOLA Desk Instructions – Debit Balances on Partnerships.

ix The liquidator's or joint estate cross claim

Where the joint estate is not sufficient for the payment of all of its debts, the official receiver as liquidator of the partnership (or trustee of the partnership estate in article 11 cases) should total the value of the unpaid debts (both preferential and non-preferential) and claim this amount against the separate estate of each member of the partnership. However, this only applies to cases under Articles 8, 10 and 11 and where there has been a consolidation order under Article 14. It cannot apply either under Articles 7 and 9 as there are no separate estates or where the cases are all separate i.e. not administered under IPO94. This claim will then rank equally with the other ordinary unsecured debts of each separate estate. This means that any unpaid balance of a preferential debt in the joint estate is not classed preferentially in the separate estates.

The official receiver's remuneration must not be charged on any amount transferred from a surplus on the joint estate to a separate estate or on a distribution from a separate estate to the joint estate or other separate estate of a member of that partnership.

LOLA cannot deal with this automatically and therefore Estate Account Services (EAS) should be contacted in the first instance.

x Surplus on the joint estate

Where a surplus exists on the joint estate after payment of expenses and creditors’ claims, it should be distributed to the separate estates according to the members’ respective rights and interests in the partnership i.e. per the partnership agreement (if any). Refer to your SOM to determine such claims.

xi Surplus on the separate estates

Any surplus remaining on a separate estate after payment in full of all its expenses and claims should be returned to the member after the accounts have been audited. It is, however, unlikely that there will be any surplus remaining on a separate estate as any well-funded separate estate will bear the burden of paying expenses arising from the joint estate as well as the unpaid expenses of the other separate estates.

xii Priority of debts for the joint estate

The order of payment of debts in the joint estate is:

preferential debts;
the debts which are neither preferential nor postponed debts(ordinary unsecured debts);
statutory interest under section 189 on the joint debts;
the postponed debts
statutory interest under section 189 on postponed debts.
surplus to the (insolvent) members

Any shortfall which remains after part payment of the debts 1 and 2 is then claimed by the liquidator/trustee proving in each of the separate estates for the full amount of the shortfall. The claim by the liquidator/trustee ranks equally for payment with the unsecured creditors in the separate estates.

A postponed debt is usually a loan where the rate of interest varies according to the profits earned by the partnership and in a bankruptcy a postponed debt could be one owed to a spouse or civil partner.

xiii Priority of debts for the separate estates

The order of payment of debts in the separate estates is:

1. preferential debts

2. the debts which are neither preferential nor postponed debts (including any liquidator's claim from the joint estate)

3. interest under section 189/328(5) on all debts

4. postponed debts

5. interest on the postponed debts

6. surplus to the bankrupt or shareholders of the company.

For an example of how this works see Technical Manual Chapter 36 Annex I.

Notes:

No member of a partnership may prove for a joint or separate debt in competition with the joint creditors unless the debt has arisen as a result of fraud or in the ordinary course of business carried on separately from the partnership business.
The official receiver is not entitled to remuneration for his/her services in connection with:

the transfer of a surplus from the joint estate to a separate estate
a distribution from a separate estate to a joint estate, or
a distribution from the estate of a separate partnership to the separate estates of the members of that partnership.

Where can I find out more?

The Partnership Act 1890

The Insolvent Partnerships Order 1994

The Insolvency Regulations 1994 (as amended)

The Insolvency Proceedings (Fees) Order 2004

The Insolvency Proceedings (Fees) (Amendment) Order 2007

The Insolvency Proceedings (Fees) (Amendment) Order 2008

Technical Manual

Chapter 36 Estate Accounting

Chapter 53 Partnerships

Case Help Manual

Consolidations

Closing a Case

Distributions – Bankruptcy and Companies

Partnerships

Lola Desk Instructions

Forms to be used:

There are no specific partnership forms to use for distribution purposes. Please refer to the forms part of the Case Help Manual part : Distributions – Bankruptcy and Companies

Click HERE to view the Flowchart showing Procedure for dealing with credit balances in Partnership – Separate Estate cases

Click HERE to view the Flowchart showing Procedure for dealing with credit balances in Partnership – Joint Estate cases

Procedure

LOIS references are shown in brackets, e.g. (DO73)

Most, if not all distributions will be carried out by the RTLUs. In practice the procedure for distribution should be planned in advance with all of the distributions taking place on one day.

1. The procedure for distributing funds in a partnership is basically the same as that for bankruptcies and companies, particularly as regards the rules concerning time limits, admitting proofs, calculating the dividend payable, advertising notice of intended dividend etc. (see the guidelines set out in the Case Help Manual part : Distributions - Bankruptcy and Companies). The main difference is the ‘theory’ behind dealing with a surplus on an estate after payment in full to the preferential creditors of that estate. The principle being that if there is a surplus on any separate estate (after payment in full to the preferential creditors of that estate) the funds will then become available to the unpaid claims of the joint estate creditors (both preferential and non-preferential) alongside the non-preferential creditors of the separate estate.

2. There is an illustrative example of distributions from the joint and separate estates (where there is a credit balance on each estate) shown in Annex I of Chapter 36 of the Technical Manual.

3. A partnership that has been wound up as an unregistered company with no bankruptcy orders against any of its members should be dealt with as if it were a company. Follow the guidelines set out in the Case Help Manual part: Distributions - Bankruptcy and Companies.

4. Where there is a credit balance on one of the separate estates with debit balances on each of the other members’ estates and the joint estate resulting in an overall debit balance, the balances should be added together and divided by the number of the estates to obtain the debit balance for each estate (see LOLA desk instructions – Debit Balances on Partnerships).

5. Where there remains a credit balance on the estate once all the expenses have been settled, the available assets will first be applied to pay the preferential creditors of that estate.

For details on how to deal with preferential creditors, please refer to the Case Help Manual part : Distributions - Bankruptcy and Companies the procedural part of which is covered in steps 10 onwards.

6. If there still remains a surplus after payment in full to that estate’s preferential creditors or if the estate has no preferential creditors at all, the total deficiency on claims in the joint estate (both preferential and non-preferential) then become provable debts in each of the separate estates.

7. This aggregated amount from the joint estate ranks equally with the non-preferential claims of the separate estate.

8. Treat any distribution from a separate estate to the joint estate as the realisation of any other asset but do not charge official receiver's remuneration or the Secretary of State fee on it.

9. Below is an example of these rules, where there is a credit balance on only one of the separate estates:

	Joint Estate	S/E Smith	S/E Jones
Balance	0.00	0.00	1500.00
Prefs	2000.00	0.00	0.00
Unsecured	70000.00	17000.00	15000.00

10. The liquidator of the partnership claims the balances of unpaid creditors’ claims against the separate estates of Smith and Jones for £72,000.

The effect of this is as follows:

	Joint Estate	S/E Smith	S/E Jones
Balance	0.00	0.00	1500.00
Prefs	2000.00	0.00	0.00
Unsecured	70000.00	89000.00	87000.00

11 Previous balances are increased by £72000.00 i.e. the addition of the joint estate creditors’ claims (£2000 preferential and £70000 unsecured) but will only rank as unsecured creditors when a dividend is paid from the separate estate of Smith, the only estate with a credit balance.

12 The liquidator of the partnership receives a dividend and these monies, or part thereof, are used in the joint estate to pay the preferential creditors following the steps outlined in steps 10 – 14 the Case Help Manual part: Distributions - Bankruptcy & Companies.

13. The official receiver is not entitled to charge remuneration on the amount of the dividend to be distributed to the liquidator of the partnership, who has made a claim for the joint estate creditors.

14. Neither the official receiver's remuneration nor the Secretary of State fee should be charged on the amount transferred from a surplus on the joint estate or on a distribution from a separate estate to the joint estate or other separate estate of a member of that partnership.

15. Prepare the appropriate forms to creditors on LOIS as detailed in procedural step 27 of the Case Help Manual part : Distributions - Bankruptcy & Companies. (DO73).

16. If applying for release follow procedural step 28 of the Case Help Manual part : Distributions- Bankruptcy & Companies.

17. If the case has been re-opened, record the closing details on LOIS (CA65) and file all papers accordingly.