When it comes to the dissolution of a partnership, unless express provision is made in the Partnership Deed, the provisions of the Partnership Act 1890 (PA 1890) apply. Partnerships are most commonly dissolved in one of the following ways:
- By agreement of all the partners.
- By a partner where co-partners are in repudiatory (serious) breach of the Partnership Agreement (if any).
- By Notice - Commonly, parties enter into verbal agreements to carry on business as partners. Most verbal agreements of this kind will be partnerships “at will”. This is because it is unlikely that the partners will have verbally agreed to exclude the provisions of the PA 1890. A partnership “at will” can be dissolved at any time by one partner giving notice to the others. The notice can take immediate effect and only needs to be in writing if the Partnership Agreement was by Deed.
- Death, Bankruptcy or Charge - the partnership will dissolve if a partner dies or is made bankrupt. To avoid operation of this section, provision should be made in the Partnership Agreement for the remaining partners to carry on business together on paying for the bankrupt or deceased partner's share in the business.
- Retirement - Unless all his co-partners agree, a partner cannot retire from the business without dissolving the partnership. The Partnership Agreement should provide for when a partner can retire (without dissolving the partnership) and for payment of his/her share by the remaining partners.
- The court can order dissolution of a partnership when requested by a partner under the PA 1890. Such an application is only necessary when a partner is "locked into" a partnership by an agreement which does not allow him/her to leave or dissolve the partnership.
If dissolution occurs because one partner leaves (i.e. by expulsion, death, retirement or bankruptcy) the other partners may wish to continue in business together and will need to negotiate for the purchase of the outgoing partner's share.
The Partnership Agreement should contain such provisions and fix the terms of the purchase. If agreement cannot be reached regarding purchase of the outgoing partner's share in the business, the business will need to be sold.
Usually it is financially advantageous to sell the business as a going concern. This is because the goodwill of a successful business will have significant value. If a buyer cannot be found, the business will have to be broken up and the assets sold separately. If necessary, a partner can apply to the court for the business to be wound up and the assets sold. If there is a dispute between the partners, or assets are at risk, a partner can apply to the court for appointment of a Receiver or Receiver and Manager. The appointee is an officer of the court and can deal with the assets, sell the business and if also a Manager, can run the business.
The PA 1890 sets out how the proceeds of sale of the business or assets will be applied. The following rules apply after dissolution, subject to agreement:
- 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:
- 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.
In a recent case the Court of Appeal (CoA) unanimously overturned a previous High Court (HC) decision to direct the outright transfer of partnership properties to one of the partners on dissolution of a partnership at will, rather than following the usual course of directing a sale of the properties in the open market, typically by auction. The CoA followed established legal principles and authorities and concluded:
- There is no absolute rule that partnership assets be sold upon dissolution but it is the normal means of ascertaining the value of the partnership assets if they are capable of being sold. A sale on the open market will usually be the best means by which to achieve a full and fair value for the partnership assets.
- Exceptional circumstances to depart from the usual course include where:
(i) one partner has a very small stake in the partnership and selling the business as a going concern would "create disproportionate injury to the majority partners or third parties";
(ii) sale on the open market is not going to maximise the value of anyone's share in the partnership as the assets are worth little if sold separately from the goodwill;
(iii) the partnership agreement makes provision for a buy out on termination, or this is what the contracting parties intended; and
(iv) the auction process could be used by one partner to drive up the price artificially to the detriment of the other partner who wishes to buy.
There were no circumstances in this case to justify taking an exceptional course of action and a sale at auction of the partnership property would achieve a just outcome. The HC Judge had got the law wrong in directing the properties to be transferred to one partner.