Dealing with partner bankruptcy can be a difficult time for any business, especially when a separate agreement has not been drawn up to protect the partnership.

While failure is often not the first thing on a person’s mind as they set up a partnership, it is recommended that a detailed written deed addressing possible future issues is put in place. This can protect the business from dissolution and winding up if a partner is ever declared bankrupt, while also saving you from the subsequent time and effort involved in forming a new partnership.

The Partnership Act 1890

All partnerships are governed by The Partnership Act set up in 1890 if they fail to draw up their own agreement. In the event of a partner bankruptcy, they will face the following consequences under this legislation:

  • The bankrupt partner won’t have rights to future profits or losses
  • The person’s trustee in bankruptcy will take over their share
  • The partnership has to cease trading and will automatically face dissolution
  • Assets and liabilities will be established and released

The remaining partners can then choose to set up a new partnership. However, they will need to pay the bankrupt’s partner’s share in the profits and capital, and may also have a capital gains tax liability bill to contend with.

Ralli can provide dedicated legal guidance to partnerships dealing with the consequences of a partner going bankrupt. Our solicitors will be able to assist in dissolving a partnership and the set up of a new one, and provide valuable advice so the transition remains as straightforward as possible.

Protect your business with a partnership agreement

A partnership deed specifying that a partner will automatically be removed if they become bankrupt can help a business to avoid some of the problems caused in partner bankruptcy.

While a partnership will still need to liaise with the trustee, they can use their agreement to outline the financial consequences of bankruptcy, detailing how and when the trustee can arrange to deal with profits and capital.

Our solicitors also specialise in helping partnerships set up comprehensive agreements to protect their business from dissolution should a partner become bankrupt. For further information about our legal services – which also involves dedicated support during LLP insolvency – contact the team on 0161 832 6131.

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