Partnerships

Partnerships and Insolvency

Partnerships constitute an important mechanism for undertaking business.  In certain sectors, such as the legal profession, a business may not be incorporated as a company and must practice as sole traders or partnerships.  A partnership will arise automatically, where persons undertake business in common.

A partnership is not a separate legal entity.  Ultimately, the partners are fully and personally liable for the debts of the partnership. There are special bankruptcy rules in respect of partnership.   The primary recourse is to partnership assets before there is recourse to the partners’ private assets.

The High Court has jurisdiction to wind up and dissolve partnerships. An important basis, in the context of insolvency, is that the partnership business is being carried on at a loss.  A partnership with more than eight members is subject to Companies legislation, by which it can be wound up as an unincorporated body.


Insolvent Partnership

An insolvent partnership can be wound up on most of the same grounds, as an individual may be adjudicated bankrupt. A petition may be presented on a number of bases. The principal basis is that the partnership has failed to make payment on foot a statutory demand for a debt of a minimum specified amount, on foot of formal demand, within three weeks. The most common other ground is the failure to satisfy a money judgment.

The partners may be made bankrupt collectively.  A joint petition against partners may be made, where the partners as such have committed an act of bankruptcy. A debt owing by the firm is deemed owing by all partners, so that default on it may form the basis of a petition against all of the partners in the firm.

Where the partners are jointly declared bankrupt, all the partnership assets vest in Official Assignee. The Official Assignee does not become a partner. He has an interest in the same way as a deceased partner. He can take action in order to recover the bankrupt share in the firm.


Insolvency of Some Partners Only

The bankruptcy of a partner leads to the dissolution of the partnership. All of the bankrupt’s assets including the partner’s interest in the partnership, vest in the Official Assignee for the benefits of his creditors. The solvent partners are entitled to get in and to wind up the affairs of the firm and complete transactions.

The Official Assignee can apply to the court to wind up the affairs of the partnership, where this would be in the interests of the bankrupt partner. The Official Assignee may make alternative arrangements with the other partners for the realisation of the insolvent partner’s share, so that does not necessarily lead to the winding up of the partnership.

The solvent partners are to contribute their shares of capital losses in accordance with the prescribed profit-sharing ratio and receive capital rateably, in accordance with their capital contribution. Shortfalls in the capital are borne by partners proportionately relative to their capital contributions and not in equal shares.

On the dissolution of the partnership, where one or more partners is insolvent, the solvent partners are obliged ultimately, to account for any shortfall in the partnership assets. Potentially, the last standing solvent partner can be left with full liability for the partnership’s debts and liabilities.


Partnership and Individual Partner Insolvent

The bankruptcy rules distinguish between joint partnership assets and partnership liabilities and personal assets and personal liabilities. In the first instance, partnership assets are applied in full towards satisfaction of partnership liabilities. Similarly, separate assets are applied primarily to separate liabilities.

A joint (partnership) creditor is not entitled to receive anything from the individual partner’s separate assets until the separate (the individual’s) creditors have been paid in full if both are insolvent. The joint property of the firm (the partnership) is used first to meet the firm’s debts.

The separate property of the partner is used to meet his own separate debts. It is only after the debts of the joint (partnership) creditors are paid out of the joint (partnership) estate, that the separate (individual partner’s) creditors are entitled to have recourse to the joint estate (partnership).

Similarly, it is only after the separate creditors of the partner’s separate estate are paid, that the joint creditors are entitled to recourse to the individual partner’s separate estate. There are some exceptions to this principle, which are set out below.

If the partnership is not insolvent, the bankrupt partner’s creditors are entitled to his share of the surplus of the partnership assets.


Bankruptcy Petition against Partners

The Bankruptcy Act allows for a petition for bankruptcy against one, several or all partners.  A creditor may petition for bankruptcy against the partners collectively, in the name of the firm. Alternatively, a creditor may petition for the bankruptcy of one or more partners only. The court may accept the petition against all, one or more of the partners or dismiss it in whole or in part.

The court may on an application, order the names of the partners to be disclosed and verified on oath by the known partners.  Ultimately if an order is made, it is made against the partners concerned and not against the firm.

The court may adjudicate all or certain partners bankrupt, while not adjudicating others bankrupt.The adjudication of any partner bankrupt dissolves the firm.   The partnership, not being an entity in itself, cannot be adjudicated bankrupt itself.

Where a number of petitions are issued against different members of the same firm, the first presented is entitled to be heard first.


Insolvent Partnership

An insolvent partnership can be wound up on most of the same grounds, as an individual may be adjudicated bankrupt. A petition may be presented on a number of bases. The principal basis is that the partnership has failed to make payment on foot a statutory demand for a debt of a minimum specified amount, on foot of formal demand, within three weeks. The most common other ground is the failure to satisfy a money judgment.

The partners may be made bankrupt collectively.  A joint petition against partners may be made, where the partners as such have committed an act of bankruptcy. A debt owing by the firm is deemed owing by all partners, so that default on it may form the basis of a petition against all of the partners in the firm.

Where the partners are jointly declared bankrupt, all the partnership assets vest in Official Assignee. The Official Assignee does not become a partner. He has an interest in the same way as a deceased partner. He can take action in order to recover the bankrupt share in the firm.


Insolvency of Some Partners Only

The bankruptcy of a partner leads to the dissolution of the partnership. All of the bankrupt’s assets including the partner’s interest in the partnership, vests in the Official Assignee for the benefits of his creditors. The solvent partners are entitled to get in and to wind up the affairs of the firm and complete transactions.

The Official Assignee can apply to the court to wind up the affairs of the partnership, where this would be in the interests of the bankrupt partner. The Official Assignee may make alternative arrangements with the other partners for the realisation of the insolvent partner’s share, so that does not necessarily lead to the winding up of the partnership.

The solvent partners are to contribute their shares of capital losses in accordance with the prescribed profit-sharing ratio and receive capital rateably, in accordance with their capital contribution. Shortfalls in the capital are borne by partners proportionately relative to their capital contributions and not in equal shares.

On the dissolution of the partnership, where one or more partners is insolvent, the solvent partners are obliged ultimately, to account for any shortfall in the partnership assets. Potentially, the last standing solvent partner can be left with full liability for the partnership’s debts and liabilities.


Dissolution and Winding up

Winding up is separate to dissolution for partnership purposes. The default position is that any partner may dissolve the partnership by notice at any time. This is commonly followed by a voluntary winding. In many cases, this right will be varied by the partnership or other agreement.

A partner may seek dissolution of the partnership by the court on the ground that the business may be carried on, only at a loss or on the grounds that it is just and equitable to do so, regardless of what the agreement provides.  Dissolution may be granted by court order followed by voluntary winding up, without court supervision.

Once dissolution occurs or is ordered, each partner is entitled as against the other to a winding up by way of the realisation of the partnership assets and payment for the partnership debts or by way of an alternative realisation provided by the partnership agreement or other agreement of the partners.


Court Winding Up

A partner may apply to the court to have the affairs of the partnership wound up. Unlike the position with a company, the creditors do not have the right to apply to the court to have a partnership wound up under the Partnership Act.

A partnership of eight or more persons may be wound up under the Companies Act. A creditor may seek winding up under this provision.  This is in contrast to the position of partnerships of less than eight persons. Certain partnerships formed outside the State may be wound up under the Act, even if they have less than eight members.

In this case, a creditor may seek an adjudication of bankruptcy of the partners of an insolvent partnership.

The provisions relating to the liquidation of companies apply.  A liquidator may exercise most of the powers applicable in a corporate liquidation.


Criteria forCourt Winding Up

The criteria for winding up of a partnership are broadly similar to those in respect of winding up of a company.  They include

  • a statutory demand for debt of €10,000 is not paid within 21 days;
  • proceedings have been taken against a member for a partnership debt due where notice in writing of the commencement of the proceedings has been served on the partnership, which has not within 10 days, paid or secured the debt or indemnified the defendant claimed against to his reasonable satisfaction in respect of the proceedings and against all costs, damages and expenses to be incurred.  The proceedings against the member must be in respect of the claim or debt dues in his capacity as a member;
  • in the State or any certain other states, execution is returned unsatisfied;
  • it is just and equitable to wind up the firm

Application of Assets I

In 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 had the surplus applied towards whatever sums may be due to them as partners. The partners may require the partnership assets to be sold and realised.

If a dissolution and winding up of the partnership is ordered, the partnership property is to be sold, and the debts paid off. This may be done under the direction of the court, but this is not necessarily required if done by agreement.

A partner has a lien on partnership property for these purposes.  The lien is enforceable, only against the partners, their personal representatives, and assignees.  This includes the Official Assignee or trustee in bankruptcy of a bankrupt partner.

Court orders may be required to affect the sale of partnership property. If a dissolution is ordered, the court may appoint a receiver and manager, for the purpose of winding up the partnership affairs. Generally, the court has the power to make such declarations of the rights and obligations of the parties, as is required. This may be under the agreement or under the default legal position.


Application of the Assets II

Where a partnership is dissolved, the accounts must be settled in order to reflect the rights, entitlements, and obligations of the parties. The Partnership Act provides that losses, including losses of capital, are 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:

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:

  • in paying the debts and liabilities of the firm to persons who are not partners therein;
  • in paying to each partner rateably what is due from the firm to him for advances as distinguished from capital;
  • in paying to each partner rateably what is due from the firm to him in respect of capital:
  • the ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible.

Losses are to be borne in the same proportions as profits. Where partners have not contributed capital equally, but share profits and losses equally, losses relating to capital are shared equally. The proceeds of the realisation of the assets are distributed to ensure that capital losses are shared equally.


Assets Vesting

If one partner is adjudicated bankrupt, this of itself will lead to the dissolution of the partnership, unless the partnership agreement otherwise provides.  Bankruptcy terminates the partner’s authority to bind the firm.  By general law, the partner’s assets, including his entitlement in the partnership vests in the Official Assignee.

Where one or some only of the partners are adjudicated bankrupt, all his or their non-partnership assets and his or their interest in the partnership vests in the Official Assignee.  The partner’s interest / entitlement in the partnership is to the net post winding up or accounting value of the partnership assets as a whole, rather than to any particular asset or a share of it.

Neither the partners themselves nor their assignee, in the event of their personal bankruptcy, are entitled to direct recourse to the partnership assets. There must be a winding up or another realisation.


Realising Share in Partnership

The Official Assignee of the individual bankrupt partner cannot claim the partner’s share in the bankruptcy until it has been wound up or an account has been taken to measure the share concerned of the net partnership assets. The partnership assets as such are not available, without the partnership being wound up or an account taken and the assets distributed.

In some cases, the partnership agreement may make specific provision for a buyout of a partner’s shares in the event of his leaving the partnership, either by bankruptcy, death or voluntarily. The valuation basis should be provided and must be reasonable.

An assignee or successor to the partner, including the Official Assignee / a trustee, does not become a partner. He may become a co-owner of the partnership assets. However, his entitlement remains limited to the net amount of partnership assets available on winding up.


Information and Realisation

A bankrupt partner is obliged to deliver separate statements of his non-partnership affairs and partnership affairs to the Official Assignee. The bankrupt partner must give a statement of affairs in respect of the partnership and his interest in it. The Official Assignee may require the bankrupt’s fellow partners to provide information regarding the bankrupt’s interest in the partnership.

The Official Assignee is entitled to require the solvent partners to account to him in respect of the bankrupt’s share in the same way as the partner himself could do He may require the sale of the partnership assets for this purpose.

There is a procedure by which the Official Assignee may recover partnership assets in the name of the partners. He may call on the partners to recover the assets or debts concerned, and if they refuse to do so, he may apply for and obtain the consent of the High Court to proceed on behalf of the partnership.  The other partners are not entitled to release the partnership debt.


Partnership Property / Assets

The property used by the partnership does not necessarily belong to it.  It may belong to one or more partners.  Partnership property may be held by particular partners and used by the partnership.  There may be a lease or some other arrangement which accounts for the use of the property, which is in place between the partner(s) who owns the property and the partnership.

All partners may be co-owners of property, and it may be partnership property.  The legal title may be in the name of one or more partners, but it may be nonetheless partnership property. Its status may be governed by terms of the partnership agreement.

Title to property may be held by one or more partners but be used by the partnership in circumstances where it is not partnership property. In this case, it belongs to the individual partner who has a legal and beneficial title. The property or the bankrupt’s interest in it is available to his creditors and not those of the partnership.


Nature of Partnership Debts and Obligations

In the absence of agreement otherwise, a debt owed to or by a firm (partnership) is a joint debt and not a joint and several debt.  It is presumptively a single debt owed by the partners collectively. Often, the relevant contract, such as a loan agreement changes this default position so as to provide for joint and several liabilities.

Some important consequences follow from joint liability. There is one debt or liability only. The release of one partner releases them all. In the bankruptcy of a third party or the bankruptcy of a partner, the separate debts of either may not be set off.

The Partnership Act provides that liability on foot of torts (civil wrongs) and breaches of trust is owed jointly and severally. However, they are not usually liquidated sums, but they are in principle capable of set off.

In the case of ordinary debt collection, a creditor of a partnership may take proceedings against all, or one or more of the partners. The other partners may be joined to the proceedings. There are procedures in the court rules which facilitate disclosure of the identities of the partners of a partnership, which is sued. The nature of the proceeding does not affect the substantive liability of the parties.


Partner and his Creditors subordinated to Partnership Creditors

The fundamental rule is that the partnership assets are applied primarily for partnership debts. The partners’ separate individually owned assets are applied primarily in respect of their individual separate debts. Generally, it is only in the event of a shortfall in one and a surplus in the other that recourse may be had to the other pool of assets.

A partner who is owed money by the firm, may not prove, claim or recover it in an actual or technical winding up before the external creditors have been paid or provided for.  The principle also applies to creditors whose return is based on a share of profits.  This could be an external investor or seller of the partnership business itself or of its goodwill concerned.

There is an exception in respect of funds which have been fraudulently misappropriated by another partner. The principal does not apply where the partnerships creditors are not prejudiced such where it has no debts.

Where a bankrupt partner is owed money by the partnership, this may not be repaid, without a full account of the partner’s net position being taken. A (separate) creditor of an individual partner is not entitled to prove in the bankruptcy of the partnership, as he is not a creditor of the partnership.  His claim is limited to any surplus (if any) on the winding up of the partner’s interest in the partnership. If there is no surplus for the partners, he has no recourse to the assets of an insolvent partnership.


Partnership Creditors effectively subordinated to Partner’s Separate Creditors

The general principle is that the (joint) creditors of the partnership itself are subordinated to the partners’ separate/ individual creditors (for non-partnership debts). Equally, the other partners must  also yield to the claims of the separate creditors in the bankruptcy of individual partners.

While partners are usually jointly (and or and severally) liable for the partnership debts, a partnership creditor may not prove  both in the insolvency of the firm and the individual partner at the same time. 

However, if there are no partnership assets available whatsoever, partnership (joint) creditors may prove as separate creditors of the partners. This may arise where there are no partnership (and therefore no joint estate) assets and there are no solvent partners..

The principle does not apply where a partner has fraudulently taken partnership assets. It appears, that the (joint) creditors of the partnership may claim in that partner’s bankruptcy, at least to the limit of the assets converted.

There is a further exception   where the  individual partner has carried on a separate trade and thereby become indebted to the partnership under an arms length contract. In this case the firm or the joint estate may recover these debts in competition with the separate creditors.


References and Sources

Irish Books

Burke & Comyn Personal Insolvency Law               2014

Bracken Practioner’s Personal Insolvency Handbook 2013

Law Society (Wright)       Insolvency Law                  2009

Sanfey & Holohan            Bankruptcy Law & Practice2nd Ed             2010

Farry, Holohan  Consolidated Bankruptcy & Personal Insolvency Legislation2013

Forde, Kennedy & Simms              Company Insolvency                      2015

Forde & Simms Bankruptcy Law 2nd Ed 2009

UK Books

Insolvency Law and Practice (Report of the review committee chaired by Sir Kenneth Cork CBE, 1982, Cmnd 8558) (the Cork report)

V Finch, Corporate Insolvency Law: Perspectives and Principles 3rd Ed 2017

RM Goode, Principles of Corporate Insolvency Law (4th Ed, 2011)

A Keay and P Walton, Insolvency law: corporate and personal (4rd Ed, 2017)

Marsh Bankruptcy Insolvency and the Law 2016

WW McBryde, Bankruptcy 2nd Ed, 1995

Butterworths Insolvency Law Handbook 14th Ed 2012

Core Statutes on Insolvency Law and Corporate Rescue (annual editions)

Legislation

Personal Insolvency Legislation

Personal Insolvency Act 2012

Personal Insolvency (Amendment) Act 2015

Personal Insolvency Act 2012 (Part 6) (Commencement) Order 2013, S.I. No. 14 of 2013

Personal Insolvency Act 2012 (Commencement) (No. 2) Order 2013, S.I. No. 63 of 2013

Personal Insolvency Act 2012 (Establishment Day) Order 2013, S.I. No. 64 of 2013

Personal Insolvency Act 2012 (Authorisation and Supervision of Personal Insolvency Practitioners) Regulations 2013, S.I. No. 209 of 2013

Personal Insolvency Act 2012 (Authorisation of Approved Intermediaries) Regulations 2013, S.I. No. 216 of 2013

Personal Insolvency Act 2012 (Personal Insolvency Practitioner Authorisation and Renewal of Authorisation Prescribed Fees) Regulations 2013, S.I. No. 246 of 2013

Personal Insolvency Act 2012 (Accounts and Related Matters) Regulations 2013, S.I. No. 247 of 2013

Personal Insolvency Act 2012 (Commencement) (No. 3) Order 2013, S.I. No. 285 of 2013

Personal Insolvency Act 2012 (Value of interest in property) Regulations 2013, S.I. No. 330 of 2013

Personal Insolvency Act 2012 (Prescribed Protective Certificate Personal Insolvency Arrangement Application Form) Regulations 2013, S.I. No. 331 of 2013

Personal Insolvency Act 2012 (Prescribed Protective Certificate Debt Settlement Arrangement Application Form) Regulations 2013, S.I. No. 332 of 2013

Personal Insolvency Act 2012 (Prescribed Debt Relief Notice Application Form) Regulations 2013, S.I. No. 333 of 2013

Personal Insolvency Act 2012 (Schedule of Creditors) Regulations 2013, S.I. No. 334 of 2013

Personal Insolvency Act 2012 (Procedures for the Conduct of Creditors’ Meetings) Regulations 2013, S.I. No. 335 of 2013

Personal Insolvency Act 2012 (Notification in relation to Excludable Debt) Regulations 2013, S.I. No. 337 of 2013

Personal Insolvency Act 2012 (Additional Information to be contained in the Registers) Regulations 2013, S.I. No. 356 of 2013

Personal Insolvency Act 2012 (Part 4) (Commencement) Order 2013, S.I. No. 462 of 2013

Personal Insolvency Act 2012 (Prescribed Fees in Bankruptcy Matters) Regulations 2013, S.I. No. 465 of 2013

Personal Insolvency Act 2012 (Prescribed Financial Statement) Regulations 2014, S.I. No. 259 of 2014

Personal Insolvency Act 2012 (Regulatory Disclosure Statement of a Personal Insolvency Practitioner) Regulations 2014, S.I. No.319 of 2014

Personal Insolvency Act 2012 (Written Statement Disclosing All of the Debtor’s Financial Affairs) Regulations 2015, S.I. No. 416 of 2015

Personal Insolvency Act 2012 (Prescribed Fees) Regulations 2015, S.I. No. 620 of 2015

Personal Insolvency Act 2012 (Renewal of Authorisation of Personal Insolvency Practitioners) Regulations 2016, S.I. No.226 of 2016

Justice Courts and Civil Law (Miscellaneous Provisions) Act 2013

Courts and Civil Law (Miscellaneous Provisions) Act 2013 (Part8) (Commencement) Order 2013, S.I. No. 286 of 2013

Courts and Civil Law (Miscellaneous Provisions) Act 2013 (Part 7) (Commencement) Order 2013, S.I. No. 463 of 2013

Courts and Civil Law (Miscellaneous Provisions) Act 2013 (Section 2) (Commencement) Order 2014, S.I. No. 334 of 2014

Personal Insolvency (Amendment) Act 2015 (Commencement) Order 2015, S.I. No. 414 of 2015

Personal Insolvency (Amendment) Act 2015 (Commencement) (No. 2) Order 2015, S.I. No. 514 of 2015

Bankruptcy Act 1988

Bankruptcy (Amendment) Act 2015

Bankruptcy Act 1988 (Commencement) Order 1988, S.I. No. 348 of 1988

Bankruptcy Act, 1988 (Alteration of Monetary Limits) Order 2001, S.I. No. 595 of 2001

Bankruptcy Act 1988 (Official Assignee Accounts and Related Matters) Regulations 2013, S.I. No. 464 of 2013

Bankruptcy (Amendment) Act 2015 (Commencement) Order2016, S.I. No. 34 of 2016

Rules of the Superior Courts (Bankruptcy) 2013, S.I. No. 461 of 2013

Rules of the Superior Courts (Bankruptcy) 2016, S.I. No. 232 of 2016

Rules of the Superior Courts (Bankruptcy) 2012, S.I. No. 120 of 2012

Bankruptcy (Amendment) Act 2015 (Commencement) (No. 2) Order 2016, S.I. No. 253 of 2016