Partnerships have always been interesting but splintered when it comes to the insolvency regime.

A recent article in April 2012 Corporate Rescue and Insolvency by David Gibson, a partner in the Debt, Restructuring and Recovery team at national law firm Dundas & Wilson, gives a detailed break down of the process available to partnerships.

The insolvent partnerships legislation is:

● Partnership Act 1890 — governs the relations between the partners of a business, unlimited liability and mutual agency.

● Limited Partnerships Act 1907 — governs limited partnerships.

● Insolvency Act 1986 (IA 1986) and the Insolvency Rules 1986 — parts apply to insolvent partnerships.

● Company Directors Disqualification Act 1986 (CDDA 1986) — parts apply to partners.

● Insolvent Partnerships Order 1994 (IPO 1994) — replaced the Insolvent Partnerships Order 1986 which allowed for an insolvent partnership to be wound up as an unregistered company and for creditors to take personal insolvency action against one or more of the partners; introduced two further insolvency options in the form of partnership administrations and Partnership Voluntary Arrangements (PVAs).

● Limited Liability Partnerships Act 2000 (LLPA 2000) — created the LLP as a corporate entity with separate legal personality and limited liability for members.

● Limited Liability Partnerships Regulations 2001 (LLPR 2001) — applied the corporate insolvency regime set out in the IA to LLPs.

● Enterprise Act 2002 (EA 2002) — amended the IA 1986 and introduced the out of court method of appointment of administrators.

● Insolvent Partnerships (Amendment) Order 2005 (Amendment Order) and Limited Liability Partnerships (Amendment) Regulations 2005 (Regulations) — harmonised the treatment of partnerships and LLPs with that of companies in terms of administration procedure.

The insolvency legislation may be applied to a partnership as follows:

● the firm itself is wound up as an unregistered company

● the firm is wound up as an unregistered company with concurrent petitions being presented against one or more of the former partners;

● the individual partners present a joint bankruptcy petition against themselves, but the firm itself is not wound up as an unregistered company; and

● where petitions for a bankruptcy order are presented against one or more partners but not against others, no attempt being made to wind up the firm.

● Administration order

● PVAs

The priority of debts in an insolvent partnership is as follows:-

Joint estate in payment of partnership debts and statutory interest.

Separate estate in payment of separate debts and statutory interest.

Any surplus on the partnership estate will be transferred to separate estates in proportion to the rights and interests of the partners.

Where the partnership estate is deficient the liquidator will prove for the shortfall against the estate of each partner as a non-preferential and non-postponed creditor. Any distribution from a separate estate becomes part of the joint estate.

A key point to remember is that if partnership creditors remain unpaid out of the partnership estate, any claims for unpaid balances will be apportioned amongst the individual partner’s estates and they will rank pari passu with the ordinary creditors of these separate estates.