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Partnership Insolvency

30 November 2012

Only a short time ago, or so it seems, the prospect of a professional firm facing insolvency was almost unheard of. Partners had followed an academic path and, if they were never going to be extravagantly rich, they were always going to be comfortable.  No longer it seems and the implications of a firm’s failure are now well recognised.

Fortunately, the law has moved with the times and, provided early advice is both sought and followed, there is a real likelihood that the business can be preserved and the individual partners avoid ruin.

For most purposes, a partnership is treated like an unregistered company and itself subject to insolvency procedures independently of its individual or corporate partners.  However, Limited Liability Partnerships are governed by different regulations and the insolvency and winding-up of them more closely resembles the practice in relation to companies.

For a firm, it may propose Partnership Voluntary Arrangement (“PVA”), that is to say, an agreement with creditors in satisfaction of the firm’s debts or a scheme of arrangement.  That proposal may or may not be supported by a moratorium preventing the firm’s creditors seeking to enforce their debts whilst the proposal is considered.

Alternatively, the firm may be placed into administration with a view to the rescue of its business.

If a decision by the partners is not taken (or not taken quickly enough), then serious consequences may follow. Creditors may, for example, petition to wind-up the partnership alone; or in conjunction with at least one partner; or in conjunction with all of the partners.

In that regard, it must be remembered that creditors can proceed against one or more or all of the partners in their own names, even though the liability is a debt of the partnership.

Beyond an insolvency petition, a judgment creditor of the firm can seek to enforce that judgment (a) without the Court’s permission, if that partner acknowledges service of the claim on behalf of the firm or is served personally with the claim or if he admits that he is a partner; or (b) with permission on the court finding the partner liable to personally satisfy a judgment debt of the firm.

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