Case study – Partners of a partnership – full exposure
5 March 2019: The Hitchin office has recently dealt with a two partner unincorporated partnership that is experiencing financial difficulty.
The unincorporated partnership has assets which would only be sufficient to cover some of its liabilities. Therefore, as the partnership does not provide a limited liability to its members, the individual partners were left exposed in respect of partnership debts. To deal with this issue, the partners initially proposed a partnership voluntary arrangement (PVA) to creditors which included the partner’s personal assets. It was hoped this offer would help avoid an application from creditors for their personal bankruptcy. However, creditors voted against the PVA. So, what happens next? Do the partners have any way of avoiding personal bankruptcy for the partnership’s debts?
To answer these questions the next step taken by BRI was to negotiate with the largest creditor and explain that the partners were willing to contribute their personal assets to the partnership, in the event that it is wound up. This removes any commercial reason for making the individual partners bankrupt and benefits creditors via the costs of the bankruptcies being avoided.
How does one wind-up an unincorporated partnership? One way is for the partners to decide to dissolve the partnership, sell the assets and pay creditors without any formal insolvency process. The alternative is to make an application to court for the winding-up of the partnership and for a Liquidator to then be appointed.
The benefits of a formal insolvency process is that the Liquidator of an unincorporated partnership can take steps to realise the assets, correspond with the creditors, as well as review and supervise any contributions to the partnership debs from the partners. The partners demonstrating to creditors their co-operation with the liquidation process could help them avoid bankruptcy, as creditors may accept that any further action against them personally will only add costs and will not increase realisations.
BRI’s professional advisers look at finding options that are commercially viable and provide the best outcome for all parties concerned.