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Winding Up - A Guide
Where the partners have decided that the partnership has no viable future or
purpose then a decision may be made to cease trading and wind up the
partnership. Clearly such a decision should not be taken lightly and we would
recommend that all other options are carefully considered and compared to the
objectives of the partnership and the individual partners.
There are two basic ways that the partnership can be wound up: the creditor’s
petition and a partner’s petition
Creditor’s Petition
A creditor can petition to wind up the partnership but not issue bankruptcy
petitions against the individual partners. Or the creditor can issue a petition
to wind up the partnership concurrently with a bankruptcy petition against one
or more of the individual partners.
Partner’s Petition
The partners can petition to wind up the partnership but not issue bankruptcy
petitions against the individual partners. Or the partners can issue a petition
to wind up the partnership concurrently with a bankruptcy petition against the
individual partners.
The Winding-Up Process
The partnership is treated much like an unregistered company and is wound up in
the same way as a company. The tasks of the liquidator are therefore to
1. Realise the assets in the partnership including any deficiencies due on the
partner’s individual capital accounts (the partners will have to pay such
deficiencies if required). All debtors, property and other assets will be
collected by the liquidator.
2. Investigate the conduct of the "officers of the partnership" just as the
liquidator in a company liquidation must do.
2.1. Interestingly the liquidator can initiate actions against the partners to
seek to disqualify them as partners in a partnership (Insolvent Partnerships
Order 1994)
2.2. The liquidator must also ascertain whether any transactions have taken
place that put the partners (individually or collectively) into a better
position than they should be then such transactions (known as preferences or
transactions at undervalue). If such transactions have been completed before the
winding up, they can be un-done. The court can order that the partners reverse
the transaction.
3. The liquidator completes his /her work by making payments (called
distributions) to the creditors in order of priority (if any distributions can
be made).
It is usually preferable to allowing creditors to wind the company up. Common
sense dictates that allowing creditors to initiate such proceedings indicates to
creditors and the liquidator that the partnership /partners have failed to act
in the best interests of the body of creditors as a whole. Many people in
companies or partnerships are told by accountants or advisors to just cease
trading and "let someone wind the thing up". In our opinion this is very poor
advice. We always recommend taking decisions to ACT.
The Advantages of Winding up
By initiating such action themselves the partners as individuals may avoid the
disqualification of the partners and as company directors, however this will
depend on their actions pre the failure and whether they had acted at all times
correctly and in the creditor’s interests.
The creditors will know that an insolvency practitioner must be appointed where
the winding up process is used. This can ensure (sometimes) a better return,
investigation into the officers conduct pre insolvency and the knowledge that
the partnership will not increase debts.
In rescue and restructuring work the partnership can quickly terminate leases
and contractual liabilities.
Disadvantages of Winding up.
As in all liquidations the assets of the business can be much less than if the
business continued. Such insolvency "meltdown" frequently disappoints officers
of companies or partnerships because the believe that the values are much higher
than can be achieved at, say, a liquidation auction. Add to this the
crystallising of claims such as landlord’s lease liabilities, HP, lease
contracts and employee claims and the overall debt position can actually
increase.
This double whammy often leads to nil or very small dividends for unsecured
creditors.
Winding up can be a very expensive process and the cost of the work undertaken
can be recovered from the assets of the business if there are sufficient funds
to do so. But if the assets are insufficient (especially after a meltdown) the
partners themselves must make up the fees and costs shortfall.
From the partner’s perspective winding up can lead to their personal bankruptcy
if they are called upon to make good the deficiencies of the partnership. They
can also be disqualified if the liquidators investigation un covers misfeasance
or mis-conduct and they cannot re-use the trade name of the partnership for up
to 5 years.
Most creditors are unlikely to see any real dividend unless the partners can
make up the shortfalls. But if a rescue plan (such as simultaneous individual
voluntary arrangements (SIMIVA) partnership voluntary arrangements (PVA) or
partnership administrations (PA) is used they may see higher returns and
continuance of trade in the future which can be equally important to receipt of
debts.
Finally
Before deciding to wind up the partnership please review all the contents of
this site and take advice from either an insolvency/turnaround practitioner in
your area or call us on 0800 9700 539. Or
email us with your basic details and
we will call you back at an agreed time and in confidence.
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