Partnership Act 1890
Although the Partnership Act 1890 does not formally define “dissolution”, the term generally refers to the ending of a partnership. Unlike a limited company, a traditional partnership does not have a separate legal identity from its partners. This means the partners may be personally responsible for the partnership’s debts and obligations. As a result, different legal and financial consequences can arise depending on whether one partner leaves or the entire partnership is brought to an end.
Technical dissolution vs General dissolution
A technical dissolution occurs when the membership of a partnership changes, for example because a partner retires or a new partner joins. In legal terms, the existing partnership ends and a new partnership begins immediately with the revised group of partners. In practice, however, the business usually continues without interruption.
A general dissolution is different because the partnership comes to a complete end. The business is wound up, rather than continuing through a newly formed partnership or a replacement group of partners.
Voluntary dissolution
In a voluntary dissolution, if all partners unanimously agree to dissolve the partnership, it can be ended regardless of the terms of the partnership agreement. Written agreements usually set out the winding up of trading obligations and assets.
Automatic dissolution
There are several triggers for automatic dissolution provided by the Partnership Act 1890.
Fixed-term partnerships are dissolved upon the expiration of the term; partnerships created for specific purposes or undertakings will also dissolve upon the termination of the specific purpose.
Partnerships entered into at will may be dissolved by a partner by giving notice to the others in accordance with Sections 32 and 26 of the Act. Alternatively, it may be dissolved upon the death or bankruptcy of one of the partners. A partnership may also be dissolved if an event occurs that makes it unlawful for the business to continue operating.
Automatic dissolution can disrupt the partnership’s day-to-day operations and reduce its profitability. Events such as a partner’s death or bankruptcy are often unexpected and outside the control of the other partners. If either event brings the partnership to an immediate end, the remaining partners may face serious financial and commercial consequences. For this reason, partnership agreements often exclude these automatic triggers and instead contain agreed exit arrangements. This can provide greater stability and certainty if a partner dies or becomes bankrupt.
Dissolution by court order
Where partners enter into a dispute and there are no triggers available for the dissolution of the partnership, they can apply to the court for a dissolution order under Section 35 of the Partnership Act. The court can order the dissolution of a partnership under the following grounds:
- When a partner deliberately or persistently breaches the partnership agreement
- When it is unreasonable and impractical to continue the operation of the partnership with a partner due to their conduct
- When there is no profit from the operation of the partnership
- If the court finds that it is fair for the partnership to be dissolved
Dissolution by court order is usually a general dissolution where the partnership ends in its entirety instead of being restructured through the replacement of partners.
If you would like advice or assistance about the dissolution of a partnership, call Nath Solicitors and book your consultation today.