Joint and Several Liability for Debts in A Partnership

A partnership is a trading entity made up of a number of individual "members". In insolvency there is no protection for each of the members of the partnership, as in a limited liability company. Therefore, the individual partners are fully liable for the partnership debts if the partnership cannot meet them.

What is Joint and Several Liability?

These terms imply that all members are liable for the partnership debts in full or in part individually, dependent on their ability to pay. Thus a creditor(s) /liquidator can "go after" the member with the most assets to satisfy debts, then the next and so on until all debts are satisfied or until all partners are made bankrupt.

Joint and Several Liability will apply to you and your partner, so long that you have a joint account, a partnership account and two or more people have signed a guarantee or mortgage for a joint liability.

Trading as a partnership can carry some tax rewards and other benefits but when things go wrong or the partnership becomes insolvent (or even if an individual partner becomes insolvent) a partnership can be a nightmare to deal with.

If a partner as an individual has an insolvency problem, perhaps from overspending/borrowing, gambling or drinking (or all of these) and is being pursued by a creditor(s) this can lead to problems. It is even possible for the spouse of a partner to become insolvent, thus leading to the loss of the matrimonial home which, for example, may underpin security granted to a bank.

If a debtor (partner/spouse) is issued with a County Court Judgment or Statutory Demand and this remains unsatisfied, the creditor can notify the partnership of this outstanding debt and ask for the partnership to pay it. This is grounds to issue a petition to wind up the partnership if the debt is not paid.

Therefore, the creditor can effectively bring down the partnership. If for example the meltdown of assets in liquidation allied to an increase in creditors claims (eg from landlords and employees) means that there are insufficient assets in the partnership to satisfy the debts the individual partners will be required to make up the shortfall.

If the shortfall is large enough it could lead to the individual bankruptcy of one or all the partners. Finally such an event may lead to the loss of the matrimonial home of the individual partners to make up the shortfall in the personal estate or to make higher payments to creditors.

This domino effect can be catastrophic for assets, individuals and families. 

There are powerful arguments to incorporate a fast growing partnership or one that is increasing its debts especially where tightly drawn up partnership agreements are NOT in place.

Limited Liability Partnership (LLP)

If you are in a Limited Liability Partnership, you have slightly more protection than if you were in a partnership. Doctors, accountants, lawyers and other professions often choose this business structure to ensure as individuals, they have more protection against personal liability. 

If your LLP is under financial pressure, see our page on the options available. 

Categories: Personal Guarantee What Happens In Insolvency?, Implications for Directors