Dissolution of a partnership
Dissolution of a partnership occurs when the partnership relationship terminates. There are two forms of dissolution: a general dissolution and a technical dissolution. A technical dissolution arises when one partner leaves and/or another partner joins, but the business carries on under a new partnership arrangement. In this case, the old firm is dissolved and replaced by a new firm of partners, which takes on the assets and liabilities of the old firm and allows the business to continue uninterrupted. To any person outside the partnership, the partnership appears unchanged. General dissolution, on the other hand, refers to a dissolution of the partnership resulting in the winding up of the business. Following the winding up process, once the liabilities of the partnership to its creditors have been paid and any remaining assets have been distributed, the partnership will then terminate.
The Partnership Act sets out certain events, the occurrence of any of which could potentially trigger a general dissolution of the partnership. However, to determine the dissolution events applicable to a particular partnership, one should, also, take into consideration the partnership agreement itself, because with regards to certain (not all) termination events the partners have the option to either disapply them completely (namely, provide that these events do not lead to the dissolution of the partnership) or, alternatively, ensure that they only lead to a technical dissolution (namely the exit of the partner concerned and the continuation of the partnership with the remaining partners). The agreement of the partners on the applicable dissolution events will commonly be reflected in writing in the partnership agreement, but sometimes it could, also, be expressed or implied through the partners’ course of dealing. Below is an analysis of each dissolution event which, unless intended by the partners otherwise, could lead to a general dissolution of the company:
• Unanimous agreement of the partners: The partners can unanimously agree to dissolve the partnership, regardless of the terms of the partnership agreement (section 19, PA 1890). The unanimous consent can be either express or inferred through their conduct.
• Expiration of a fixed term partnership: Unless the partners agreed otherwise, a partnership entered into for a fixed term dissolves on the expiration of that term. Similarly, unless there is agreement to the contrary, a partnership with a single purpose or undertaking dissolves on the termination of that purpose or undertaking (Section 32(a) and (b), PA 1890).
• Notice to dissolve: A partnership agreement may provide that a partner (or several partners) have the power to dissolve the partnership on serving notice. Unless the partners have agreed otherwise, a partnership at will may be dissolved by any partner giving notice to the others of his intention to dissolve the partnership (section 32(c) and section 26(1), PA 1890). Due to the ruinous effects an unplanned dissolution may have on a business, it is usual for the partnership agreement to exclude such a unilateral right to dissolve the partnership.
• Death or bankruptcy of a partner: Every partnership is dissolved as regards all the partners on the death or bankruptcy of any single partner, unless the partners have agreed otherwise (section 33, PA 1890). Most partnership agreements will exclude the effect of section 33 and will specify the bankruptcy or bankruptcy of a partner as a ground for expulsion of the partner concerned under the partnership agreement, with the partnership business continuing with the remaining partners.
• Charging order placed on a partner: A partnership may, at the option of the other partners, be dissolved if any partner suffers his partnership share to be charged under the PA 1890 for his separate debt (section 33(2)). To dissolve the partnership, the charging order must be made under the PA 1890 and not under other legislation. It is worth noting that the dissolution must be effected by all the other partners not a majority of them and at their option.
• Dissolution by illegality: A partnership is dissolved by the occurrence of any event which makes it unlawful for the business of the firm to be carried on, or for the members of the firm to carry it on in partnership (section 34, PA 1890). This section cannot be excluded by agreement.
• Dissolution by order of the court: A court may order a dissolution of a partnership on the application by a partner on the following grounds (Section 35, PA 1890):
Permanent incapacity of a partner.
Conduct by a partner calculated to prejudice the carrying on of the business.
Deliberate or persistent breach of the partnership agreement by a partner or conduct by a partner that makes continuation of the partnership business with him impracticable.
The partnership business can only be carried on at a loss.
Dissolution of the partnership is just and equitable.
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