Dissolving a partnership

What is it?

Dissolving a partnership, or dissolution, means ending that relationship.

Does it always lead to winding up and closure of the partnership?

Not always. It can be a technical dissolution which occurs when a partner leaves and/or a new one joins and the business continues, or it can be a general dissolution which usually leads to the winding up and end of the business.

In normal circumstances, partners will wish to preserve the business and goodwill of the partnership and ensure that it continues, despite a partner joining or leaving. A well drafted partnership agreement will set out how partners join and leave the partnership and contain provisions to enable the partnership to continue in such circumstances, i.e. an option to acquire an outgoing partner’s interest in the partnership.

In the absence of a partnership agreement, the partnership is governed by the provisions of the Partnership Act 1890. In the context of the life of the partnership, this means a partnership can be ended by events such as a partner giving notice or by the death, bankruptcy or retirement of a partner.

This leads to the end of the business, resulting in the realisation of its assets, payment of its liabilities and distribution of any remaining proceeds in accordance with the partners’ rights.

This may not be what the partners expected or intended to happen on the departure of a partner, so a partnership agreement should include provisions to ensure that it is only dissolved in circumstances planned for by the partners , i.e. with the consent of all or a majority of the partners, and that otherwise it should be able to continue.

Other circumstances in which a dissolution could arise include dissolution by the court, rescission for fraud or misrepresentation, or if it is unlawful to carry on the business.

Once a partnership is dissolved, the partners retain authority to wind up the its affairs and complete any unfinished transactions as necessary to wind up the partnership affairs. That authority does not extend to taking on new business and contracts entered into after dissolution. Dissolution accounts will need to be prepared to finalise the partnership’s affairs.

The dissolution of the partnership may be publicised by a partner, and other partners may be required to participate to some extent. This has the benefit of limiting a partner’s liability to third parties but consideration may need to be given as to how this is dealt within the circumstances, i.e. if there is a sale of the business pending or it is a professional practice.

Insolvent partnerships are dealt with under the provisions relating to insolvent partnerships which adapt the provisions of the Insolvency Act 1986 (IA 1986) for application to general partnerships.
Dissolution of a partnership is usually an extreme step where there is no alternative, such as in the case of retirement of all the partners or a dispute between the partners. If the partnership has a partnership agreement, it may include provisions to minimise the risk of dissolution – this is one of the reasons we strongly recommend creating an agreement.

For more information on any of the above issues, please contact Tricia MacKenzie at [email protected] or on 01905 746476.