Partnerships & Insolvency
Each partner is liable not only for his/her business and personal debts they are also liable for their partner’s business and personal debts on a joint and several basis – unless an LLP is in use.
If a partnership or a partner is experiencing financial difficulties each or all partners should take advice. The general principles underlying partnerships are the same as for individuals or other unincorporated bodies.
Insolvency problems for partnerships are dealt with by a hybrid set of regulations. A partnership can thus be subject to the following procedures:-
- Partnership Voluntary Arrangement
- Interlocking IVAs
- Partnership Administration Orders
- Compulsory Winding up
Partnership Voluntary Arrangements
When a partnership has financial difficulties it can enter into Partnership Voluntary Arrangement (PVA) which will take account of the partnership’s assets and liabilities and debts. A PVA is very similar in concept to the Company Voluntary Arrangement (CVA). However due to the personal liability of each partner usually each partner will almost certainly need to have an Individual Voluntary Arrangement (IVA) to protect their personal assets as each partner is liable for the total partnership debts in full.
As with other forms of Voluntary Arrangements, a Licensed Insolvency Practitioner must supervise the voluntary arrangements and a Nominee is required to prepare the proposal, make comments on the proposal to creditors and to the Court.
Sometimes partners can have interlocking IVA’s in place of the PVA particularly if the partnership is small with indistinct assets. Here each IVA would include the full debts due by the partnership and how and by how much they will be repaid.
Partnership Administration Orders are granted by Court on the application of creditors or partners when the partnership can be shown to be insolvent. The business of the partnership is run by an Insolvency Practitioner who hopefully would be able to maximise the realisations by selling as a going concern. Whilst the Administration route is beneficial in that it protects the partnership assets by way of moratorium
This is where a creditor has petitioned. Each partner will receive a bankruptcy petition at the same time. The business is likely to have to cease.