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Partnership Administration - A Guide
Useful links for this page - FAQ's
A Partnership Administration Order is similar in some ways to Administration for
a limited company, but should not be confused with this or administrative
receivership.
The Process:
If a partnership is experiencing severe financial difficulties, is actually
insolvent or about to become insolvent then it can be an option to consider.
Typically there is an urgent need to deal with the problem as the business is
running out of cash very quickly and needs protection. All of the partners must
be solvent. Effectively the partnership administration is to protect the
partnership whilst a restructuring, refinancing or sale is considered.
The Application:
After drawing up a statement of affairs of the partnership it is decided that
the business is under real threat of being wound up by creditors or wrongful
trading.
The partners or one of the partnership creditors (this is rare) can petition to
the court for an Admin order. Typically the partners are helped by an insolvency
practitioner as an administrator must be a licensed IP (insolvency practitioners
are licensed by the DTI and heavily regulated).
At this stage the partnership obtains some protection from the Court in the form
of a partial moratorium. It is unlikely that other legal actions can continue –
except with leave of the court. This application for an order stops creditor’s
actions against the partnership (unless the court allows otherwise).
The Hearing
At the hearing the court considers the application and whether it should allow
the court to grant powers to the administrator to run the partnership affairs.
The court may then grant the order which gives full protection to the
partnership – a full moratorium providing all conditions are met and the rules
observed.
Then the IP is appointed as administrator and effectively he/she takes control
of the partnership affairs.
The Purpose of the Administration order
The admin order is granted only when the one of three options is being pursued.
1. The proposal of a partnership voluntary arrangement
2. Survival of all or part of the business as a going concern
3. A more orderly realisation of assets than may happen in winding up (In other
words a voidance of the meltdown of assets inevitable in liquidation.
In due course, but over the next 3 months (or longer if the court allows, but an
application must be made for an extension) the IP must make proposals to the
creditors and members of the partnership. A meeting will usually be called for
the creditors to consider the administrator’s proposals. These are then
implemented if approval is gained.
If survival or realisation is the aim then a simple majority of creditors need
to vote in favour. If a PVA is being suggested then over 75% of creditors must
vote in favour. (See a guide to partnership voluntary arrangements or guide to
individual voluntary arrangements).
Benefits
The benefits of Administration are
1. Protection of the partnership business from creditors – for example those
with writs, Judgments, or winding up petitions.
2. The IP is in control of the partnership business and has 3 months to examine
the issues, work out solutions and come up with the best proposal for dealing
with the insolvency.
3. Where creditor pressure is mounting it prevents creditors pushing themselves
up the insolvency ladder and collecting debt by using legal actions. (See
Creditors a Guide)
4. It may maximise creditor’s interests as a whole
5. If a partner becomes insolvent the individual partner’s creditors cannot then
attack the partnership.
Risks
The risks or downsides are:
1. As in Administration of a company the fact that a licensed IP is in control
of the partnership inevitably leads to significant costs. As a consequence it is
our contention that as a mechanism it is powerful but only really suitable for
larger partnerships with larger assets and debts than most SME partnerships
2. All creditors and customers must know that the business is in administration
– all communications (such as letters, invoices, purchase orders etc) must state
that the business is in administration).
3. There must be sufficient liquidity for the partnership to trade through the
administration process.
4. Administration does not protect the individual partner’s estates. If they
become personally insolvent because of the administration they can be personally
attacked by their own individual creditors. (A solution may be to use
SIMIVA’s
instead - click to read more about this).
5. The partners lose control of the business
Clearly such risks can be outweighed by the protection afforded by
administration and the ability to fundamentally restructure the business – such
as removal of non performing parts of the business.
Without finance however (perhaps from the partners themselves) the
administration may not be a viable proposition. It may be worth considering a
PVA directly supported by IVA’s or perhaps SIMIVA’s.
This is a complex legal area – we can help call us now on 01289 309431 or 0800
9700539.
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