The dissolution of a partnership does not mean dividing everything equally. Before any distribution can take place, the partners must identify the partnership assets, value them, settle liabilities and determine each partner’s entitlement under the partnership agreement and the Partnership Act 1890.
Where relationships have deteriorated, each of those stages can become contentious.
What belongs to the partnership?
The first question is often the most difficult: which assets are partnership property?
Legal title is important, but it may not be conclusive. The court may consider how an asset was acquired, who paid for it, how it appears in the accounts and what the partners intended. Land, machinery, livestock, vehicles, intellectual property, customer records and goodwill may all give rise to disagreement.
An asset owned personally by one partner does not necessarily become partnership property simply because the partnership used, maintained or insured it. Equally, an asset registered in one partner’s name may still have been acquired on behalf of the partnership.
In the absence of clear documents, the parties’ historic conduct and financial records can become central evidence. Please see my previous article.
Does “equal partners” mean an equal division?
Not always. A partner’s entitlement depends on the partnership agreement (if there is one) and the state of the partnership accounts.
Unless otherwise agreed, partnership losses must be addressed and external creditors paid before the partners receive any remaining value. The statutory accounting process will ordinarily require payment of:
- Debts owed to third-party creditors
- Advances made by partners beyond their agreed capital
- Capital contributed by the partners
- Any remaining surplus, divided in the applicable profit-sharing proportions
Disputes commonly arise over drawings, partner loans, unpaid profits, personal expenditure charged to the business and liabilities incurred without the other partners’ authority.
If there are serious questions as to how matters have been dealt with in the accounts, then there may become the need to seek independent forensic accounting of historical accounts.
Sale, transfer or buy-out?
A partner will not necessarily be entitled to take a particular asset as part of their share. One partner may want to retain the land, another the machinery, while both claim the customer base and goodwill.
If agreement cannot be reached, the assets may need to be sold and the proceeds distributed. That can destroy value, particularly where the business could otherwise continue as a going concern.
A negotiated buy-out may offer a better commercial outcome, but it introduces further questions:
- What is the correct valuation date?
- Should assets be valued individually or as part of a continuing business?
- Is any discount appropriate?
- How should goodwill be valued?
- Who bears tax, finance and transaction costs?
Independent valuation evidence is often decisive and key to achieving a sensible solution. It is also an informative starting point for discussions to take place between the parties.
Preserving assets pending resolution
Litigation may also concern what happens before the final account. Partners remain accountable for partnership property and should not remove, dispose of or exclusively exploit assets for personal benefit without proper authority.
Urgent court relief may be required where there is a risk that assets will be sold, transferred, concealed or allowed to deteriorate. In appropriate cases, the court may order disclosure, restrain dealings or appoint a receiver to preserve and realise partnership property.
The practical lesson
Partnership dissolution is an accounting process as much as a legal one. Clear asset records, current accounts, written ownership arrangements and an agreed valuation mechanism can significantly reduce uncertainty. It may also provide the parties with an opportunity to have sensible discussions.
When a partnership ends, the strongest position is rarely held by the partner with the loudest ownership claim. It is held by the partner with the clearest documents.
Our specialist team can support you with compliance awareness so that you do not get caught out. Contact Natalie Dean today for help.