Ending a General Partnership
Published 18 June 2020. By Wattey Kemnay.
First and foremost, what is a partnership? A partnership refers to relationship between two persons or more (which includes individuals or corporate entities) carrying on a business (which includes every trade, occupation and profession) in common with a view of profit.
Under certain circumstances, it may not be straightforward to determine whether a partnership indeed exists or whether it was just two sole traders operating a business together in some shape or form (e.g. a photographer and a website designer working together to set up a wedding photography business while being employed full-time elsewhere).
Bringing a partnership to an end could be a very complex process and is even more so if the partners are in dispute.
There is no legal definition of ‘dissolution’ in relation to a partnership but it is the term used to refer to the end of a partnership. There are two distinct categories of dissolution:
Technical dissolution (sometimes called partial dissolution), and
Both of these categories of dissolution occur when a partnership is solvent.
When the composition of a partnership changes, e.g. a partner dies or retires from a partnership or a new partner is admitted to a partnership, the partnership in existence immediately before the change is dissolved.
A general dissolution is the full dissolution of the partnership and followed by a winding-up of the partnership and the taking of and settling of accounts. A general dissolution may be done:
By agreement – Often the partnership agreement describes how the partnership may be dissolved (e.g. upon occurrence of certain events, after a particular date or by exercising specific power to seek dissolution granted to a certain partner under the partnership agreement). In absence of such contractual clause, partners may subsequently agree to dissolve the partnership by entering into an ad hoc binding dissolution agreement.
By notice – A partnership may also be dissolved by a partner serving of a notice of dissolution where such an action is provided for in the partnership agreement.
By death or bankruptcy – Partnerships automatically dissolve if any partner dies or becomes bankrupt, subject to contrary agreement.
By court – A partnership may also be dissolved by an order of court on various grounds, for example, the mental incapacity or other ill-health of a partner, business can only be carried out at a loss, fraud, misrepresentation, rescission or illegal activity. Dissolution of a partnership by a court order is likely to arise when partners are in dispute and cannot reach an agreement.
When there is a breakdown in relationship, the most efficient way to orderly dissolve a partnership would be by way of an agreement. It helps partners working out their differences as they part way, save time and money, achieve a workable exit solution as opposed to a court-imposed solution, preserve business and relationship. If, however, the partnership is insolvent, then an insolvency practitioner must be appointed.
A partnership dissolution agreement normally addresses a number of key issues:
- debts and liability of the partnership
- final partnership accounts
- distribution of assets and losses
- rights of deceased or retired partners (if any)
- dealing with goodwill of the partnership
- address employee position of a partner (if relevant)
We assist professional service partnerships, including, GP, retail business, property developers and architects. In order to provide an all-encompassing solution when a partnership is brought to an end or in the event of disputes between partners, we work closely with accountants to find and negotiate practical solutions that are workable between both parties and avoid expensive court proceedings.
Should you require any further information on the above, please contact the Corporate team at MKB Law.
This article is for general guidance only and should not be regarded as a substitute for professional legal advice.