Dissolution

Question 1

What is dissolution?

Answer 1

Dissolution of a partnership means that the contractual relationsihp joining all of the current partners comes to an end

Question 2

What governs the arrangements of dissolution within a partnership?

Answer 2

It should be the Partnership Agreement, but failing that the PA 1890 provides the details

Question 3

Where are the events that lead to dissolution outlined?

Answer 3

PA 1890 s32-35 though these provisions may be excluded by agreement

Question 4

How can a notice of dissolution be given, and what is a ‘partnership at will’?

Answer 4

A notice of dissolution may be given by any partner to others.
It need not state a reason, can have immediate effect, and need not be in writing for ‘partnership at will.’

Question 5

What event causes a partnership to dissolve automatically?

Answer 5

Death or bankruptcy of a partner automatically terminates the partnership.

Question 6

Can a partnership be dissolved by a court order, and on what grounds?

Answer 6

Yes, a court can order dissolution under PA 1890, s 35.
Grounds include the ‘just and equitable’ ground, which gives the court wide discretion.
Court intervention is rare, as most partnerships can be dissolved without it.

Question 7

What are the circumstances under which a partnership might dissolve due to illegality?

Answer 7

If it is illegal to carry on the business of the partnership, the partnership will dissolve under PA 1890, s 34.

Question 8

What happens upon the expiry of a fixed term in a partnership agreement?

Answer 8

A partnership dissolves unless the agreement provides for continuance after the fixed term. If partners continue, it becomes a partnership at will with terms consistent with that type.

Question 9

Under what circumstances can a court order dissolution be sought?

Answer 9

A court order may be necessary when a partnership agreement prevents dissolution without unanimous agreement.
This might occur when the agreement stipulates a long fixed term or the joint lives of partners without provisions for retirement or expulsion.

Question 10

What role does a charging order play in dissolution, and when might partners give notice of dissolution?

Answer 10

A charging order may be given if a partner’s share is charged for a private debt.
Partners have the right to give notice of dissolution if the creditor enforces the charge by obtaining a court order for the sale of the partner’s share in the assets.

Question 11

How does dissolution impact the division of partnership assets?

Answer 11

Dissolution results in the winding up of the firm

Question 12

Why is it generally inappropriate to rely solely on the Partnership Act 1890 for determining the duration and dissolution of a partnership?

Answer 12

Partners typically prefer to avoid the insecurity of a partnership at will and want to prevent the death or bankruptcy of one partner from causing an automatic dissolution. It is advisable for the partnership agreement to make express provisions regarding the duration and potential dissolution

Question 13

What provisions should a partnership agreement include if dissolution occurs due to the departure of one partner, and the others intend to continue the partnership?

Answer 13

The agreement should include provisions allowing the remaining partners to purchase the share of the departing partner.
It should fix the terms of the purchase to avoid uncertainties.

Question 14

What happens if the partnership agreement lacks provisions for the purchase of an outgoing partner’s share?

Answer 14

Parties may need to negotiate terms for purchasing the outgoing partner’s share.
Without agreement terms, it may take some time to settle a price.
If the agreement doesn’t address payment for the use of the former partner’s share since departure, the former partner is entitled to receive either 5% interest per annum on the share’s value or a court-ordered sum representing the share of profits attributable to the use of the former partner’s share (PA 1890, s 42).

Question 15

How can the entitlement of the former partner to receive interest or a share of profits be excluded?

Answer 15

The purchase agreement can explicitly exclude the former partner’s entitlement to interest or a share of profits attributable to the use of their share (PA 1890, s 42).

Question 16

What happens if partners can’t agree on continuing the business and buying an outgoing partner’s share during dissolution?

Answer 16

There must be a business disposal.
Sale proceeds pay off creditors and distribute entitled amounts to partners.
Section 39 of PA 1890 allows partners to insist on disposal and payment, even by applying to court if needed.

Question 17

Why is breaking up a business and selling assets separately less financially advantageous than selling it as a going concern?

Answer 17

Valuable asset goodwill is compromised.
Goodwill includes the benefit of business reputation, connections, and established momentum for ongoing profits.
Financially, it’s crucial for someone taking over the business as a going concern, including paying for goodwill, especially for a departing partner

Question 18

How is goodwill commonly valued in partnership dissolution?

Answer 18

Goodwill is often valued based on a few years’ profit. For instance, taking two years of profit (e.g., £25,000 and £30,000) might value goodwill at £55,000.

Question 19

What is goodwill, and why is it a significant business asset?

Answer 19

Goodwill is the benefit of business reputation, connections, and established momentum.
It’s significant as it contributes to ongoing profitability and is a valuable business asset.

Question 20

What should be considered when selling goodwill during partnership dissolution?

Answer 20

Aside from finances, selling goodwill often involves the buyer requiring a restraint of trade covenant.
This covenant restricts sellers from engaging in competing businesses immediately after the sale.
The validity of this restriction depends on its reasonableness in the circumstances.

Question 21

Why is a restraint of trade more likely to be upheld when selling goodwill?

Answer 21

Courts are more likely to uphold a restraint of trade when it protects the buyer of a business rather than restricting the activities of an individual partner leaving an ongoing business.

Question 22

What is the sequence of distributing proceeds following the sale of a business or its assets in the absence of an agreement to the contrary?

Answer 22

The sequence, as per PA 1890, s 44, is as follows:
Creditors of the firm (excluding partners) must be paid in full.
If there’s a shortfall making the firm insolvent, partners share the loss from their private assets based on the partnership agreement.
Partners who lent money to the firm are repaid, along with entitled interest.
Partners receive payment for their capital entitlement.
Any surplus is shared among the partners based on the partnership agreement.

Question 23

What happens if there is a shortfall and the firm becomes insolvent during the distribution process?

Answer 23

Partners must cover the balance from their private assets.
The loss is shared among partners according to their partnership agreement.

Question 24

What is a potential consequence for a partner who does not want the partnership to be dissolved during the distribution process?

Answer 24

An example in Hurst v Bryk [2000] 2 All ER 193 illustrates that the partner opposing dissolution may still be liable for their share of partnership debts under s 44.

Question 25

Who has the authority to wind up a firm’s affairs following dissolution, as per PA 1890, s 38?

Answer 25

Each partner (except a bankrupt partner) retains the authority to act for winding up the firm’s affairs.

Question 26

In what situations might there be a need for external involvement in the dissolution process?

Answer 26

Disputes between partners.
Assets are in jeopardy.

Question 27

Who can apply to the court for the appointment of a receiver or receiver and manager in the dissolution process?

Answer 27

Any partner.
-Trustee in bankruptcy of a bankrupt partner.
-Personal representatives of a deceased partner.

Question 28

What roles can a court-appointed receiver play in dissolution?

Answer 28

-Deal with assets.
-Conduct business (receiver and manager).
-Possibly sell the business as a going concern.

Question 29

Is the receiver or receiver and manager entitled to remuneration, and if so, from where?

Answer 29

-Yes, the receiver is entitled to remuneration.
-Remuneration comes from partnership assets, not from partners’ personal funds.
-The receiver or receiver and manager is considered an officer of the court.