When you are in a Partnership and you run into financial difficulty, both partners become joint and severally liable for all of the business debts.
This means all partners can be pursued for the debt, it is not divided up. If the creditors cannot get payment of the debt from one partner, the remaining partners will be pursued i.e. if one of the partners has no assets and wants to go bankrupt and the other partner has assets and is solvent, they can be pursued for all of the debt. The partner with no assets can go bankrupt and effectively walk away. Many partners do not understand this when partnerships are formed.
The ideal situation is to avoid this and seek help as soon as possible about your debts. There are many more angles to partnerships and you should always seek specialist advice if in any doubt. Have a look at the debt solutions below or call us for further information.
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PARTNERSHIP VOLUNTARY ARRANGEMENT (PVA)
WHAT IS A PARTNERSHIP VOLUNTARY ARRANGEMENT?
If you believe your Partnership is a going concern and can continue to trade through financial troubles a PVA may be the right option for your partnership.
A PVA is an insolvency procedure which allows a financially troubled company to reach a legally binding agreement with its creditors. In a PVA a company can pay part of their debts back or agree payment in full over an agreed period of time.
A PVA can be proposed by the partners of the partnership by using an insolvency practitioner to setup and manage it.
When the PVA has been proposed, a nominee (insolvency practitioner) reports to court on whether a meeting of creditors and shareholders should be held to consider the proposal.
The meeting decides whether to approve the PVA. If 75% of the creditors (by debt balance) agree to the proposal, it is then legally binding on all creditors who had notice of the meeting and were entitled to vote.
If the meeting of creditors and shareholders approves a PVA, the nominee becomes the supervisor of the PVA.
Once the PVA has been carried out, the company’s liability to its creditors is cleared. This allows the company to continue trading throughout the PVA and afterwards. Once the PVA has been completed any remaining debts will be legally written off and the company continues to trade as before.
HOW DOES A PVA GET APPROVED?
A PVA proposal is drafted by the directors with the assistance of insolvency practitioners.
The proposals are then sent out to all interested parties (court, creditors and shareholders) allowing 14 days notice of the creditors meeting for the PVA.
At the PVA creditors meeting 75% of the creditors (by debt balance) vote either in person or by proxy at the meeting must approve the PVA.
LIQUIDATION OF A PARTNERSHIP
A partnership liquidation happens where the partners have decided that the partnership has no viable future or purpose and a decision may be made to cease trading which will wind up the business.
As with winding up a company, there are two ways that the partnership can be wound up: the creditor’s petition or the partner’s petition.
CREDITORS PETITION IN A PARTNERSHIP LIQUIDATION
A creditor can petition to wind up a partnership, and at the same time decide whether or not to petition for the bankruptcy of each of the partners, some or none.
PARTNERS PETITION IN A PARTNERSHIP LIQUIDATION
The partners can petition to wind up the partnership and also petition for their own bankruptcy or not. The partners may decide that instead of bankruptcy they would be able to contribute to IVAs.
THE PROCESS OF LIQUIDATING A PARTNERSHIP
A Partnership is treated much like a company and is wound up in the same way as a company. The tasks of the liquidator in the partnership liquidation are to:
Realise the assets of the partnership including any monies due on the individual partners. If a partner has entered into an IVA then only a proportion of these would be repaid. If they go bankrupt then it is likely nothing would be repaid. All debtors, property and other assets would be collected by the liquidator.
Investigate the conduct of the partnership in the same way as the liquidator in a company liquidation must do.
-If the partners conduct warrants it, the liquidator can initiate actions against the partners to seek to disqualify them as partners in a partnership (Insolvent Partnerships Order 1994)
-The liquidator must also ascertain whether any transactions known as preferences or transactions at undervalue have taken place. If such transactions have been completed before the partnership liquidation, they can be un-done. The court can order that the partners reverse the transaction.
The liquidator completes his/her work by making payments to the creditors in order of priority.
If your partnership serves no further purpose or is experiencing financial difficulties that cannot be remedied there are certain advantages in initiating your own winding up liquidation. By taking such a partnership liquidation themselves the partners as individuals may avoid the disqualification of the partners and as company directors, however this will depend on their actions prior to the failure and whether they had acted at all times correctly and in the creditors interests.