Insolvency of Partnership Business

Insolvency of partnerships

If your Partnership Business debts are greater than its assets, or its trading income cannot cover its debts, then your partnership could become insolvent.You should take financial and legal advice as soon as your partnership starts getting into trouble. Your accountant, who may already be familiar with your business, may be able to advise you on how to avoid insolvency and the winding up of your partnership by a liquidator.

You and your partners can propose a partnership voluntary arrangement to settle the partnership’s debts with its creditors. In partnerships, individual partners have “joint and several liability”. This is where any individual partner has to pay back the entire amount of a debt which all partners entered into. To remove the individual partners’ joint or several liability to meet the partnership debts, the partners will either have to pay off the whole partnership debt or propose an individual voluntary arrangement (IVA).

If individual partners are unable to pay the debts of the partnership or propose an IVA, then that individual partner could become subject to personal bankruptcy. See the page in this guide on the insolvency of individuals.

If one of your partners becomes personally bankrupt, provided the partner has applied to be made bankrupt without winding up the partnership, the remaining partners can continue trading. Although the debt will be written off for the bankrupt partner, a creditor can still pursue the other partners for the whole debt.

A creditor can also apply:

  • for one of the partners to be made bankrupt, without the winding up of the partnership
  • to have the partnership wound up without action being taken against the individual partners
  • for the partnership to be wound up and bankruptcy orders presented against one or more of the partners

In certain circumstances, the trustee in a bankruptcy can make a claim against the partnership estate. The trustee can be the official receiver (OR) or an accountant or insolvency practitioner appointed either by the court where a bankruptcy order follows a failed IVA, by a meeting of creditors called by the OR or by the Department of Enterprise, Trade and Investment (DETI). The trustee can take possession of any assets, sell them and distribute the proceeds to creditors. If, however, the remaining partners pay off the joint debts, then they may have a claim in the bankruptcy instead.

Joint bankruptcy petition by individual members of a partnership

It is also possible for all members of a partnership to present a joint bankruptcy petition to the court. This costs only the same as an individual presenting their own bankruptcy petition . When the bankruptcy orders are made this dissolves the partnership. All debts of the partnership as well as the debts of the individual partners are included in the bankruptcies.

Find insolvency forms on the DETI website.

In a limited liability partnership (LLP) the situation is similar to that for the insolvency of limited companies. See the page in this guide on the insolvency of limited companies.

In limited partnerships – rather than LLPs – there must be at least one general partner, and while the limited partners lose only their investment – provided they have not taken part in the management of the partnership – the general partner(s) will be liable without limit for all the outstanding debt. This could lead to personal bankruptcy of the general partner(s). Unlike in a general partnership, the bankruptcy of a member of a limited partnership does not result in the dissolution of the partnership.

Insolvency of partnerships