A partnership ends in one of two ways. Either the partners dissolve it and settle the accounts between themselves, or it cannot pay its debts and an insolvency procedure settles them instead. The first is a private process under the Partnership Act 1890 and your partnership agreement. The second puts a licensed insolvency practitioner in charge.
A partnership has no limited liability. In England and Wales, every partner is liable, jointly with the others, for the firm’s debts incurred while they were a partner. That single fact shapes every decision below. A dissolution that leaves a debt unpaid leaves it with the partners personally.
This page covers general partnerships in England and Wales. A limited liability partnership is a separate legal entity and closes differently; see winding up an LLP.
When a partnership is dissolved
Read the partnership agreement first. Most of the Act’s dissolution rules apply only “subject to any agreement between the partners”. A well-drafted agreement can add events, remove them, or let the continuing partners buy out a leaver without ending the firm.
Where the agreement is silent, or there is no written agreement, the Act dissolves the partnership when:
- a partnership for a fixed term reaches the end of that term;
- a partnership formed for a single venture completes it;
- in a partnership with no fixed term, any partner gives notice of dissolution to the others. It takes effect on the date in the notice, or when the notice is communicated if no date is given;
- any partner dies or is made bankrupt, unless the agreement says otherwise;
- an event makes it unlawful to carry on the business. This applies in every case, whatever the agreement says.
The court can also order dissolution on a partner’s application. Applying does not dissolve the firm; the court’s order does. The grounds include a partner’s permanent incapacity, conduct that harms the business, persistent breach of the agreement, a business that can only be carried on at a loss, and any case where dissolution is just and equitable.
The Act has no mechanism for retirement. Without a retirement clause, a partner who wants to leave a partnership with no fixed term does so by giving notice, and that notice dissolves the whole firm. In a fixed-term partnership there is no such right, so the agreement or the court decides.
General and technical dissolution
- General dissolution: the business stops. The partners wind up its affairs, settle what it owes and divide what is left. The firm ceases to exist.
- Technical dissolution: one partner leaves and the others carry on, often under the same name. In law the old firm has ended and a new one has begun, even though customers may see no change.
A technical dissolution turns on valuing the leaver’s share, including goodwill and customer relationships. Agree that value and pay it out promptly. If the continuing partners use the firm’s assets without a final settlement, the Act lets the leaver claim either the share of later profits the court attributes to their share of the assets, or interest at 5% a year on the value of that share, unless the partners agreed otherwise.
Winding up a solvent partnership
Dissolution does not stop the partners’ authority at once. Each partner can still bind the firm so far as needed to wind up its affairs and complete transactions already begun. That authority cuts both ways: a partner can still commit the others while the winding up runs, so agree early who signs what.
Unless the partnership agreement says otherwise, the Act fixes the order in which the firm’s money is paid out. The firm’s outside creditors still come first, whatever the partners agree between themselves. The residue is not divided by “stake”:
- debts owed to people outside the firm;
- money a partner advanced to the firm beyond their capital;
- each partner’s capital;
- whatever is left, in the proportion in which the partners share profits.
Between the partners, any loss is met first out of profits, then out of capital, and lastly, if necessary, by the partners personally in the proportion in which they share profits. That split does not limit what a creditor can claim from any one partner.
Tell everyone the firm has dealt with. Until they have notice of the change, a customer or supplier can treat a departed partner as still being a partner. For people who never dealt with the firm, a notice in the London Gazette counts as notice. A partner who leaves stays liable for debts incurred before they left, unless the creditor agrees to release them.
Close the tax position as well. The nominated partner sends a final Partnership Tax Return, each partner sends their own Self Assessment return for the year, and any VAT registration must be cancelled. Prepare accounts for the old firm to the date of dissolution, and start new ones for any continuing business.
When the partnership cannot pay its debts
Everything above assumes the firm can pay everyone outside it. When it cannot, the partners’ own settlement cannot put them ahead of the firm’s creditors, and each partner is exposed for the shortfall. The Insolvent Partnerships Order 1994 provides for these routes:
- Partnership voluntary arrangement: the firm keeps trading and pays creditors an agreed amount over time, supervised by an insolvency practitioner.
- Administration: an administrator is appointed over the firm under Schedule B1 to the Insolvency Act 1986, as the Order applies it to partnerships, to rescue the business or get a better result for creditors than a winding up would.
- Winding up as an unregistered company: the firm is wound up by the court, on a creditor’s petition or on a petition by a partner. The petition can run alone, or alongside bankruptcy petitions against individual partners.
- Joint bankruptcy of the partners: all the partners present a joint bankruptcy petition, and the firm’s affairs are dealt with through their bankruptcies, without a separate winding up of the firm.
Individual partners can also propose their own individual voluntary arrangements. A creditor who is owed £5,000 or more by a partner personally can petition for that partner’s bankruptcy.
The order of events matters. A split agreed between the partners while creditors go unpaid is the arrangement most likely to be unpicked later. If your partnership owes more than it can pay, call AABRS® on 0208 444 3400 before the partners sign anything, or contact us.