In a recent article we recapped the type of partnerships available and specifically, that of ‘basic partnerships’ governed by the Partnership Act 1890 (the PA Act).
In short, it primarily highlighted the stark default position of a partnership being automatically dissolved if one of the partners became bankrupt, that is, unless there is a well drafted Partnership Agreement in place. This is provided for by section 33 PA 1890 and states “…subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner”.
In such a scenario, what happens? What is the effect of bankruptcy on a partnership, other than being immediately dissolved?
In addition to the PA Act, the Insolvent Partnership Order 1994 (IPO 1994) comes into play. However, it is not an easy read and has been described as “an indigestible patchwork of provisions.” It was nonetheless necessary to consider in the context of the recent case of Brake v Swift [2020] EWHC 1810.
The case
The case concerned a claim by Mr and Mrs Brake, against the trustee in bankruptcy, Mr Duncan Swift, to re-vest (to transfer back) Mr and Mrs Brake’s interest in the Cottage (and some parcels of land) from the bankruptcy estate pursuant to section 283A of the Insolvency Act 1986. This is an important piece of law, as it places a short time, of 3 years, on a Trustee in Bankruptcy to ‘do something’ with the bankrupt’s sole or principal residence (usually referred to as “the Family Home”). That is to sell the interest or transfer it. If a Trustee in Bankruptcy fails to do anything within the prescribed 3 years of the bankruptcy order being made, then the property re-vests back to the bankrupt. Where the family home is usually the only asset of value in many smaller bankruptcies, this can be catastrophic for the Trustee and creditors.
The question in this case was whether the Cottage was the bankrupt’s “sole or principal residence” making it subject to the 3 year limitation.
There is a very complex and lengthy history to the facts of this case (if you wish to read the judgment in full – https://www.bailii.org/ew/cases/EWHC/Ch/2020/1810.html). But in summary, the Court had to consider the history and how the Cottage came to be, alongside the PA Act and the IPO 1994 and decide whether the Cottage was the sole residence of the bankrupt, whether it was Partnership Property and how the IPO 1994 might affect the position, amongst other matters.
In particular, the IPO 1994 provides that if an asset is considered as “Partnership Property”, then it does not matter who is registered as the legal owner of the Property, it will actually be held on trust for the Partnership as a whole. Further, pursuant to IPO 1994, it is incorrect to assume that partners are entitled to an equal split in all partnership assets. The IPO 1994 provides for a specific accounting exercise to be undertaken in order to decide what the split is when a partnership is insolvent and dissolved. Consequently, because it is held on trust for the Partnership, a Trustee in Bankruptcy would not entitled to any legal interest.
The Court nonetheless ultimately held that the Cottage was not the sole, principal residence of the bankrupt, thus the 3 year time limit did not apply.
It is however interesting to see that perhaps, if the Cottage was the sole, principal residence of the bankrupt, but was held to be Partnership Property, then it would not vest in the Trustee in Bankruptcy, rather, the bankrupt’s interests in the partnership would and thus be, subject to the PA 1890, any Partnership Agreement and, in particular, the accounting process pursuant to the IPO 1994.
There was an interesting additional argument concerning a proprietary estoppel claim that probably did vest in the trustee, and might have been subject to the 3 year time limit, however, for the present purposes, that would not have had any difference in this case, because the Cottage was not a principle residence so the 3 year time limit was irrelevant.
This case was particularly complex in nature, due to the events having taken place over a number of years, and then a later partnership forming, further complicating matters. However, it nonetheless highlights the importance of obtaining legal advice to carefully consider your position and the effect that bankruptcy can have on you and anyone else involved in a partnership arrangement.
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