Waiving Winding Up
Following dissolution, either with or without a court order, the partnership must be wound up. The strict position, in the absence of an agreement to the contrary, is that upon the dissolution of the partnership, the partners are entitled to have the property of the partnership applied towards payment of the debts and liabilities of the firm and have the surplus applied towards whatever sums may be due to them as partners.
Commonly the winding up is waived by the terms of the partnership agreement. Even where it is not so provided, the parties may, and often do waive the requirement where a winding-up is not desired or would be economically disadvantageous.
Alternative provision is usually made when a partner retires, leaves or dies. He or his estate may be (at best) paid the value of his partnership share. The value may be realised over a longer period. He may be given another investment interest in the partnership while his share is being realised and paid to him. He may forfeit some or all of the value under the partnership agreement.
Duties on Dissolution I
On dissolution, it is the duty of the partners to wind up the firm’s affairs, whether with or without court assistance. Any partner may apply to the court for an order to wind up the partnership and its affairs if the partners do not do so voluntarily (unless the partnership agreement provides otherwise).
The Partnership Act recognises that the partners are best positioned to wind up the partnership affairs. Each partner has a lien on the partnership property for this purpose. The lien is enforceable, only against the partners, their personal representatives, and assignees. Their assignees include the Official Assignee or the trustee in bankruptcy of a bankrupt partner.
Duties on Dissolution II
An outsider dealing with the firm is entitled to treat the firm as continuing until receipt by him of actual notice of dissolution. Where the third party does not have notice of the dissolution, the outgoing partner may, therefore, be bound as if the partnership was not dissolved.
Any partner may notify the dissolution to the public. He may require his co-partners to sign the notice of dissolution for publication in the State official journal. Third parties who begin dealing with the firm after dissolution are deemed to be on notice the advertisement in the State journal.
Winding Up I
Where a partnership is dissolved, the partners have the duty and authority to wind-up the firm’s affairs. New business should not be sought or undertaken, unless necessary for winding up. The commencement of winding up may terminate employment agreements in some cases. They may continue where it this is necessary for the purpose of winding up.
A partner who winds up the firm, whether under court order or not, remains a fiduciary in relation to his fellow / former partners. He continues to owe a duty of good faith including, in particular, the duty to avoid a conflict of interests. He may not profit from the position.
Winding Up II
The partnership agreement may provide a mechanism for the sale of the retiring partner’s share, which limits or excludes fiduciary obligations. In particular, it may provide for the purchase of the outgoing partner’s share by the other partners, at a discount for by forfeiture.
The partners must keep accounts of post-dissolution transactions as part of their obligations to keep a full account of the winding of the partnership affairs. Ultimately, a full account of realisations and payment must be maintained and provided to all partners.
Where a partner leaves or dies and the other partners continue in business without any settlement or purchase of his interest, the outgoing partner or his personal representatives are entitled to share the profits made since the dissolution. This right applies to revenue profits and is subject to any agreement to that contrary. The position is displaced if the continuing partners have and exercise an option in the partnership agreement, to purchase the outgoing partner’s share.
On the dissolution of a partnership, the partnership assets must be sold. Each partner is entitled to have the assets of the partnership applied in payment of its debts and liabilities and have the surplus applied in payment of the sums due to the partners (if any).
Each partner has authority to bind the firm for the purpose of completing the firm’s transactions and the winding up the firm. Dissolution will not usually terminate employee contracts, as in most cases, they will continue until the business of the firm is wound up.
The partners are entitled to have the assets sold to the highest bidder. The right to sell partnership assets exists, even if the liabilities could be discharged without such a sale. The right to force a sale in such circumstances is subject to any provision to the contrary in the partnership agreement.
Exceptions to Sale
The Courts have allowed exceptions to each partner’s presumed right to force a sale. The courts exercise a discretion where the partner’s share is small relative to the other shares or is not readily saleable.
Where the share of the outgoing partner is relatively small, the courts have declined to force a sale but have, instead, ordered the continuing partners to purchase the outgoing partners’ shares. The Irish Supreme Court has recognised this principle but has stated that the circumstances of the particular case were unusual and that it would not necessarily be of general application.
Where the assets are incapable of sale, a sale will not be forced. A valuation may be made instead.
Where a partner has left the partnership and recognises the continued firm, he may be barred or “estopped” from forcing a sale on the basis that he has lead the other partners to believe that he has waived the right to a sale.
Where one partner has paid a premium to the other(s) on entering a partnership for a fixed term, and it is dissolved before the expiration of that term otherwise than by death, the Court may order the repayment of the premium or such part as is just and fit having regard to the partnership contract and the length of time the partnership has continued.
The court may order that the premium need not be repaid if it determines that the dissolution is due wholly or chiefly to the misconduct of the partner concerned or has been dissolved by an agreement containing no provision for the premium.
On a general dissolution of the firm with a complete winding up, the partnership debts and liabilities must be paid in full. The partnership legislation provides that losses, including losses and deficiencies in capital, are paid first out of profits, next out of capital and lastly by the partners individually in their respective profit sharing ratios. This is subject to any contrary provision in the partnership agreement.
In the absence of agreement to the contrary, the assets of the firm, including the sums contributed by partners to make up losses where there are deficiencies of capital are to be applied;
- in paying the debts and liabilities of the firm to persons who are not partners;
- in paying each partner rateably what is due from the firm to him for advances as opposed to capital and ultimately in paying rateably what is due to him in respect of capital;
- the ultimate residue, if any, is divisible amongst the partners in proportion to their profit sharing ratio.
If there is a shortfall in any of the first three stages, it is first paid out of profits then capital and then by the partners in their profit sharing ratios.
Capital advances by partners are treated as if they were a debt to the partners. However, they are postponed to the external creditors. Provided there are sufficient monies to pay the external creditors they are paid off in proportion to their contributions.
The default position is that the sharing of capital losses or profits applies irrespective of whether the partners have contributed to the capital of the firm. The surplus or shortfall is enjoyed or made up in the profit sharing ratios as opposed to the respective capital ratios. This default rule may be changed by agreement
Where one partner is insolvent, the capital losses are not shared in proportion to the profit sharing ratio. If the insolvent partner is unable to contribute to the capital losses, the solvent partners are not required to make up the shortfall as amongst and to each other.
The deficiency in the capital account is to be distributed. The deficiency is borne in proportion to the capital contribution. This rule does not apply where the shortfall is such as to wipe out the capital account and leave a deficiency as regards outsiders.
References and Sources
Partnership Act, 1890
Partnership Law 2000 Twomey M. Butterworths
Lindley & Banks on Partnership: (19th Revised edition) 2016 Banks, Roderick I’Anson
Partnership & Llp Law (8th edition) 2015 Morse, G.
Partnership Law (5th Revised edition) 2015 Blackett-Ord, Mark; Haren, Sarah;
Right of partners to notify dissolution.
37. On the dissolution of a partnership or retirement of a partner any partner may publicly notify the same, and may require the other partner or partners to concur for that purpose in all necessary or proper acts, if any, which cannot be done without his or their concurrence.
Continuing authority of partners for purposes of winding up.
38. After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise.
Provided that the firm is in no case bound by the acts of a partner who has become bankrupt; but this proviso does not affect the liability of any person who has after the bankruptcy represented himself or knowingly suffered himself to be represented as a partner of the bankrupt.
Rights of partners as to application of partnership property.
39. On the dissolution of a partnership every partner is entitled, as against the other partners in the firm, and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm, and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm; and for that purpose any partner or his representatives may on the termination of the partnership apply to the Court to wind up the business and affairs of the firm.
Apportionment of premium where partnership prematurely dissolved.
40. Where one partner has paid a premium to another on entering into a partnership for a fixed term, and the partnership is dissolved before the expiration of that term otherwise than by the death of a partner, the Court may order the repayment of the premium, or of such part thereof as it thinks just, having regard to the terms of the partnership contract and to the length of time during which the partnership has continued; unless
(a) the dissolution is, in the judgment of the Court, wholly or chiefly due to the misconduct of the partner who paid the premium, or
(b) the partnership has been dissolved by an agreement containing no provision for a return of any part of the premium.
Rights where partnership dissolved for fraud or misrepresentation.
41. Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled—
(a) to a lien on, or right of retention of, the surplus of the partnership assets, after satisfying the partnership liabilities, for any sum of money paid by him for the purchase of a share in the partnership and for any capital contributed by him, and is
(b) to stand in the place of the creditors of the firm for any payments made by him in respect of the partnership liabilities, and
(c) to be indemnified by the person guilty of the fraud or making the representation against all the debts and liabilities of the firm.
Right of outgoing partner in certain cases to share profits made after dissolution.
42.—(1) Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since the dissolution as the Court may find to be attributable to the use of his share of the partnership assets, or to interest at the rate of five per cent. per annum on the amount of his share of the partnership assets.
(2) Provided that where by the partnership contract an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, as they case may be, is not entitled to any further or other share of profits; but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section.
Retiring or deceased partner’s share to be a debt.
43. Subject to any agreement between the partners, the amount due from surviving or continuing partners to an outgoing partner or the representatives of a deceased partner in respect of the outgoing or deceased partner’s share is a debt accruing at the date of the dissolution or death.
Rule for distribution of assets on final settlement of accounts.
44. In settling accounts between the partners after a dissolution of partnership, the following rules shall, subject to any agreement, be observed:
(a) Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits:
(b) The assets of the firm including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following manner and order:
1. In paying the debts and liabilities of the firm to persons who are not partners therein:
2. In paying to each partner rateably what is due from the firm to him for advances as distinguished from capital:
3. In paying to each partner rateably what is due from the firm to him in respect of capital:
4. The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible.
Hawkins v. Rogers.
 I.R. 48
“this action was brought by reason of certain events coinciding with, or subsequent to, the dissolution of a partnership which had subsisted for some years between the parties. The plaintiff is a person interested in horse-racing and the breeding of race-horses, while the defendant is, and has been for a good many years, a breeder and trainer of race-horses. The partnership between them commenced about the year 1943, and continued until 1949, when, by a letter from his solicitor, dated the 28th May, the plaintiff purported to terminate the partnership. For some weeks before this there had been what each party described as a “coolness” between them. The defendant, in his defence, does not admit that this letter was valid or effectual to dissolve the partnership, but says that the parties mutually agreed to sell and dispose of the entire of the partnership assets and to dissolve the partnership. The point is not very material, nor was any argument addressed to it at the hearing. The evidence made it clear that the partnership was considered and treated as having been dissolved in or about the date of receipt of the letter referred to. There was never any written partnership agreement nor any arrangement as to the length of notice of dissolution necessary and, accordingly, I would be prepared, if necessary, to hold the letter effectual for its declared purpose.
By the time the partnership came to be dissolved, its assets comprised a considerable number of horses, including foals, yearlings, race-horses in training, brood mares and one stallion. During its currency, the activities of the partnership had included the buying and selling of horses, and their breeding, training and racing. So far as the training and racing of horses was concerned, the defendant was the active partner. He carried out the training at his stables at the Curragh, Kildare, and made the entries and other arrangements with regard to the racing of horses, for which purpose he had authority to act for and on behalf of the plaintiff in a form recognised by the respective racing authorities, the Turf Club of Ireland and the Irish National Hunt Steeplechase Committee. Horses were mostly run under the name of the defendant, as owner, but sometimes under the name of the plaintiff, as owner. The partnership as such was never registered with any racing authority, but it is not clear that this could have been done, as the relevant Rules of Racing (Turf Club) and National Hunt Steeplechase Rules appear only to contemplate the registration of a partnership in respect of each individual horse. This appears to have been done in respect of one or two horses not material to present purposes. The expenses in respect of all the partnership horses (including entry fees and training charges) and any prize money or other gain were shared equally.
The letter of the 28th May, 1949, already referred to, after notifying the plaintiff’s desire to terminate the partnership, continued:
“Mr. Hawkins has asked me to request you to agree within one week to have all these horses sold by public auction. I would be obliged if you would notify me of your agreement as to this. A definite date and place for the auction can then be fixed.
Mr. Hawkins also wishes me to notify you that he withdraws his authority to act in regard of all entries, declarations and forfeits, and all other matters in connection with his own horses and those held in partnership with you, and in particular that none of the partnership horses are to be run until same have been sold. On his instruction I have written to the Turf Club notifying them of this.”
There was no written reply to this letter, but one interview and several telephone conversations took place between the writer of the letter (the plaintiff’s solicitor, Mr. Dunne) and the defendant. These were mainly concerned with the time, place and mode of sale of the horses particularly of five of the horses which were in training there being no disagreement as to a sale taking place. I have the accounts of these conversations of Mr. Dunne and of the defendant, and, while there is substantial agreement between the accounts on most matters, there is a complete conflict and contradiction on one important matter which I have to resolve for the purpose of my decision between the parties.
The defendant disputes that the sale was with the engagements, but the plaintiff counters this contention with the argument that, even if the sale were without the engagements, the latter then remained partnership property and the defendant’s conduct was then a breach of trust, which, if malice were established, gave the plaintiff a cause of action. There are several difficulties about acceding to this view. The first is that the matter is not pleaded in that way, the foundation of the plaintiff’s claim being, as I have said, that he bought the horse with engagements. Secondly, even if an amendment of the pleadings were allowed, the alleged breach of trust would be of the fiduciary relationship and mutual duties subsisting between partners, and the action would be in effect a partnership action. In the case of an action founded on the partnership relation, it is well settled, and is indeed inherent in the nature of a partnership, that one isolated partnership transaction cannot be investigated by itself, but that the proper remedy and only way of disposing of the matter is to take a full and mutual account of all the partnership dealings. A partnership action is, in fact, pending between the parties in which appropriate accounts and enquiries have been directed, with liberty to either party to surcharge or falsify any item or charge. Thirdly, if the engagements were partnership property, their value to the plaintiff could not exceed one-half of their value as a saleable asset of the partnership, irrespective of what, if any, motive the defendant had in rendering them valueless. Lastly, the defendant might be able to make some case of a legal right, notwithstanding the withdrawal of his authority to act, to deal with a partnership asset pending the dissolution, on which case the question of motive would become immaterial.
In the light of all the circumstances already detailed, I can find only one answer to this question. It is, and I so hold, that the defendant’s suggested justification is not genuine nor the real reason of his conduct. I feel satisfied that, in acting as he did, he was actuated by some ill-will towards the plaintiff and his motive was deliberately to injure the plaintiff; in other words, that he was actuated by what is known in law as malice.
This view of the matter has an important bearing, in my opinion, on the claim of the plaintiff in this action. That claim is partly based on breach of contract and the only contract involved was a sale of the horse with her engagements by the partnership to the plaintiff. The plaintiff’s status as a partner prevents him suing the partnership and neither can he sue the defendant, who is only one partner, in respect of a partnership liability. Nevertheless, he acquired, as I have held, the legal right to, and ownership of, the engagements but was deprived of any benefit therefrom by the deliberate and malicious act of the defendant. I feel the law might be justly accused of futility if the plaintiff were, in such circumstances, without any legal remedy. It is not contended on behalf of the defendant that he is without any remedy, but that his remedy is by way of partnership action involving an accounting between the partners and the ascertainment of the ultimate balance due by one to the other. This view, however, depends for its validity on the matter being a partnership one. The gist of the plaintiff’s complaint is an interference by the defendant, in his personal capacity and not as a partner, with property of the plaintiff. Could it be contended, if the defendant had deliberately injured or destroyed the horse after the sale, that such an interference with the property of the plaintiff was simply a partnership matter? Yet, the engagements had, in my view, equally become the property of the plaintiff.