The first in a new series of bite-sized FAQs on aspects of partnership and LLP law
Partnership dissolution FAQs:
What is dissolution?
In the partnership context, “dissolution” describes both an event and a process :
- The event is a dissolution notice or court order (or arbitration award), or some other event prescribed by a partnership agreement or by statute that dissolves the firm (such as the death of a partner). At that point in time the status of the firm changes so that the partners (or surviving partners) are obliged to wind up the firm.
- Sometimes the term “dissolution” is used to describe the process of winding up the firm, for example in the phrase “in dissolution”. Winding up involves taking all steps necessary to realise all assets of the firm into money, pay all creditors, and distribute the balance (if any) to the partners. There is often more to it than that, and the process can take many years.
There is a common misunderstanding that a dissolution notice terminates the relationship between partners completely and instantly. That is not the case.
Dissolution can have far-reaching and unexpected consequences, and should not be embarked upon lightly.
What is a “technical dissolution”
In a technical dissolution there is no obligation to wind up the firm, which carries on as a going concern. An example of a technical dissolution is where a firm is dissolved and some of the partners purchase the interest of the other partner(s) in the firm. Or where a partnership agreement provides that when a partner retires the partnership between him and the other partners is dissolved, but that the partnership between the others continues, and that those others are entitled to (or automatically) acquire the interest of the retiring partner.
What is a “partnership at will”?
This is any partnership that does not contain an agreement to the effect that it cannot be dissolved by notice, for example, with certain rare exceptions, neither of the following are partnerships at will:
- a fixed term partnership
- a partnership in which it has been agreed that partners who want to leave must retire.
How do I dissolve a partnership at will?
By notice, which can take immediate effect or can be stated to have effect on a later date. The notice should be in writing if the partnership is governed by a deed, otherwise it can be oral (though disputes sometimes arise as to what was said). Written notice is therefore usually to be preferred in all cases.
My partnership is governed by a partnership deed. Can I dissolve the partnership by notice?
Whether you have a deed or not, a partnership will only be capable of being dissolved by notice if there is no agreement preventing dissolution. Whenever parties have gone to the trouble of drawing up a partnership deed, it almost always makes provision for the business to continue to be run by the continuing partners when a partner leaves. In such a case, no partner can dissolve the firm by notice. But in certain circumstances a court might make an order dissolving the firm.
My partner and I have a partnership agreement that says that we are partners for life. I no longer get on with him and wish to terminate the partnership. He will not agree. What can I do?
If you indicate to him that if necessary you are prepared to apply to the court to seek a dissolution order, you might be able to persuade him to reach an agreement with you, under which one of you buys out the other or you both sell to a third party. Failing that, the Partnership Act 1890 sets out grounds on which the court can (if it thinks it appropriate to do so) dissolve the partnership, most notably if it is “just and equitable” to do so. A dissolution order is often made on this basis where the relationship between the parties has completely broken down, to the extent that the business cannot function. If one of the partners has caused the breakdown through his inappropriate conduct, the court is unlikely to make an order on his application, but might well make an order if the innocent partner applies.
I want to split from my partners and start my own business, providing a similar service. I think our partnership is a partnership at will. Should I serve notice of dissolution?
Ending a partnership is not as straightforward as that. When a notice of dissolution is served the only thing that changes is that the partners now have an obligation to wind up the business, but in a manner that maximises its value, if there is any prospect of a sale.
So, following a notice of dissolution it is more or less business as usual. There is a rule of thumb that partnerships in dissolution should not take on any new work or contracts, as the aim is now to close down the business. But in order to maximise value on a sale of the business, the more existing work/contracts and turnover that can be demonstrated to a prospective buyer the better. So far as existing contracts or other obligations are concerned, there is still an obligation to complete them.
Crucially, after dissolution, you are still in partnership with one another, and most of the rules governing partnership still apply, including the obligation not to compete. There are ways and means to split from your partners, but dissolution is probably not the solution, or the preferred solution, or may be only part of the solution.
I am a “fixed share partner”. Can I dissolve the partnership?
The term “fixed share partner” covers a number of different situations. Normally (if there are no agreements between the partners which would prevent dissolution) a partner (no matter what his title) will be able to dissolve the firm if he has a right to a share of the assets of the firm in a winding up. It is common for fixed share partners to have no rights to share in the assets of the firm on winding up, but this depends on a number of factors. You are more likely to be able to dissolve the firm if you have invested capital in the firm, and conversely you are less likely to be able to do so if you have no capital invested in the firm.
But even if you have the right to dissolve the firm you should consider carefully what the effect will be and whether this will meet your objectives.
I think my firm is going bust and I want to get out now to avoid paying my share of its liabilities. Would dissolving the firm and leaving assist me?
In a word, no. In a dissolution all of the partners are liable for the firm’s debts. But there are other methods by which you may be able to achieve your aims.