“Partnership” is a term that, surprisingly, covers a number of different types of partnership relationships governed by law.
There is the “basic partnership” governed by the Partnership Act 1890 (“PA 1890”). This type of partnership is not a separate legal entity and each partner is personally liable for the debts of the partnership – there is no limit on this liability.
The next is Limited Partnerships (LPs), governed by the Limited Partnership Act 1907. They are slightly different to basic partnerships, but are not as popular these days.
Finally, there are Limited Liability Partnerships (LLPs), incorporated by the Limited Liability Partnerships Act 2000, which are separate legal entities and work more like limited companies.
This article focuses on “basic partnerships”.
Basic Partnership – PA 1890
Section 1 of PA 1890 defines a partnership as “… the relation which subsists between persons carrying on a business in common with a view of profit.”
Note that the word “persons” can include other corporate bodies, so a partner can be an individual, as well as, a company or LLPs. However, note that a basic partnership cannot be a partner in another partnership business, because it is not itself a separate legal entity.
As to whether a basic partnership exists, will be a matter of fact. Generally speaking, there will be some contractual agreement in place determining the partnership. In some cases, it is not clear if a partnership was intended or perhaps it is being disputed, in which case the Court has been required to determine whether a partnership exists, and in those circumstances, the Court will generally look at the substance of the arrangement, not just the written document.
Why is it important to establish whether there is a partnership in a bankruptcy context?
If there is a partnership then the PA 1890 will apply and, in the context of bankruptcy, this can have serious consequences, especially if there is no separate Partnership Agreement in place which dictates what happens if a partner is made bankrupt.
Pursuant to section 33 of PA 1890 it states that the Partnership will be dissolved “by the bankruptcy or death of a partner…” Accordingly, should one of the partners become bankrupt, the partnership will be dissolved, resulting in the business being wound up. This is the statutory default position.
This can have serious legal consequences for any current contractual obligations, especially if the bankruptcy was not disclosed to the other partners leaving them ‘blindsided’ by it, with very little legal recourse as a result.
If, however, there is a well-drafted Partnership Agreement in place, which specifically changes this, then it can be the difference between a business standing a chance to succeed through a rocky patch, or one that is immediately wound up and leaving the partners facing various legal consequences.
The effect of such an immediate partnership dissolution, and how “partnership” and “non-partnership” assets can be dealt with by the Trustee in Bankruptcy, has recently been discussed in the case of Brake v Swift [2020] EWHC 1810, which is further discussed here. It was particularly important when considering whether the 3-year time limit concerning the “principle residence” applied.
If you or your business partner is facing insolvency, which might have a detrimental impact on the partnership, please do not hesitate to contact our insolvency team via email or directly on 020 8308 3610.