A partnership is not a separate legal person, so it cannot be adjudged insolvent as such. The Insolvency Act (Chapter 253) deals with the partners instead.
Sections 19 and 39 — petitions involving partnerships
A petition for insolvency against a partnership may be presented by the majority of the members of the partnership who at the time of presenting it are usually resident in the country.
(1) A creditor of a partnership may present a petition against all, or any one or more, of the members, if any of the partners has committed an act of insolvency in respect of the estate of the partnership.
(2) An order so made is valid even if it does not include all the partners.
(3) After the order, the same proceedings may be taken concerning the estate of the partnership and the partner or partners as are prescribed for other estates and persons.
(4) The section does not prevent a creditor from proceeding against a partner, or the separate estate of a partner, in respect of partnership debts in the same way as for debts due by that partner individually.
Under section 39(1) it is enough that any of the partners has committed an act of insolvency in respect of the partnership estate. That exposes every partner to a petition, whatever their own conduct.
The corollary in subsection (2) is equally important: the adjudication is valid even if it does not include all the partners. A creditor may target the solvent partner, or the one within the jurisdiction, without joining the others.
And subsection (4) preserves the ordinary law: a partnership creditor is not confined to this Act and may sue a partner or execute against their separate estate for the firm’s debts.
Section 146 — amalgamating the proceedings
Where one member of a partnership has been adjudicated insolvent and another adjudication is made against a member of the same partnership —
(a) unless the Court otherwise directs, the property of the second member vests in the trustee appointed in respect of the property of the first; and
(b) the Court may give such directions for amalgamating the proceedings in respect of the properties of the members as it thinks just.
One trustee, one set of proceedings. That avoids the cost and conflict of separate trustees fighting over which estate owns what — a concern that arises in the corporate context too, and is answered there by the pooling provisions in sections 320A to 320C of the Companies Act.
Sections 147 and 148 — joint and separate estates
Where one partner is adjudged insolvent, a creditor to whom he is indebted jointly with the other partner or partners —
(a) may prove his debt for the purpose of voting at any meeting of creditors and is entitled to vote; and
(b) shall not receive any dividend out of the separate property of the insolvent until all of the separate creditors have received the full amount of their respective debts.
Separate creditors are paid in full out of the separate estate before joint creditors touch it. A creditor of the firm ranks first against the firm’s assets; a creditor of the individual partner ranks first against that partner’s own assets.
That has real consequences when lending to a partnership. A lender who takes only the firm’s covenant may recover nothing from a partner’s personal estate until every personal creditor — the bank, the credit provider, the tradesman — is paid in full. Taking separate personal guarantees from each partner converts the lender into a separate creditor of each estate.
Note that paragraph (a) preserves the joint creditor’s right to vote at meetings of the separate estate, even though the dividend is deferred. They have a voice in the choice of trustee under section 54 and in the conduct of the administration.
Where joint and separate properties are being administered —
(a) dividends of the properties shall be declared together, subject to any contrary order of the Court on the application of an interested person; and
(b) the expenses of and incidental to the dividends shall be fairly apportioned by the trustee between the joint and separate properties, in relation to the work done for, and the benefit received by, each property.
Section 114 completes the picture on proof: where the insolvent is liable on distinct contracts as a member of two or more firms, or as a sole contractor and also as a member of a firm, the fact that the firms share members or that the sole contractor is one of the joint contractors does not prevent proof against each property respectively liable.
Section 171 — proceedings in the name of a solvent partner
(1) Where a partner is adjudged insolvent, the Court may, with the consent of the creditors testified by a special resolution, authorise the trustee to commence and prosecute legal proceedings in the names of the trustee and of the insolvent’s partner or partners.
(2) The proceedings may be taken as if commenced with the partner’s consent, and any release by the partner of the debt or demand to which they relate is void.
(3) Notice of the application shall be given to the partner, who (a) may show cause against it; and (b) on his application the Court may direct that he (i) receive his proper share of the proceeds, and (ii) if he claims no benefit from them, be indemnified against costs.
A partnership debt is owed to all the partners jointly, so an action to recover it must ordinarily be brought in all their names. A solvent partner who does not wish to sue — or who has reason to protect the debtor — could otherwise block recovery for the estate.
Section 171 lets the trustee proceed anyway, and subsection (2) makes any release by the reluctant partner void. The safeguards for the partner are in subsection (3): notice, a right to be heard, a proper share of the proceeds, and an indemnity against costs if he wants nothing from the action.
Points for anyone dealing with a partnership
- Take separate guarantees from each partner. Section 147(b) otherwise defers you behind every personal creditor of that partner.
- Remember one partner’s act of insolvency exposes them all — section 39(1).
- A petition need not name every partner, and an order against some is valid — section 39(2).
- Keep firm and personal dealings distinct. Sections 114, 147 and 148 all turn on which estate a debt belongs to.
- Consider incorporating. A company gives separate legal personality and limits shareholder liability to the amount unpaid on shares — with the whole of the Companies Act insolvency regime applying instead of this Act.
Sources
- Insolvency Act (Chapter 253) — ss 19, 39, 54, 114, 146–148, 171
- Companies Act 1997 — ss 36, 320A–320C
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.