Partner leaving
If there is no partnership agreement or if the agreement is silent on retirement or termination (i.e. there is a ‘partnership at will’), the effect of a partner leaving is that the partnership is dissolved (see s.26 PA 1890). This is because ‘partnership’ is a collective noun meaning ‘all the partners’ and so the continuity of a partnership is broken when there is a change in the identity of the individuals who constitute it. In most cases this is a ‘technical dissolution’. This means that a new partnership is formed by the remaining partners who continue the business. However, it is open to any of the partners to apply to court to have the old partnership wound up (i.e. sale of the assets for the repayment of the partnership debts and for the distribution of the assets or liabilities amongst the partners).
To prevent dissolution when a partner leaves, the partnership agreement should state explicitly that the partnership will continue as between the remaining partners and should contain details of how a partner can leave (which may include a provision in the event of death) or be expelled without the partnership being wound up. This would usually include a mechanism for the remaining partners to buy out a departing partner’s share.
Dissolution of partnership
A partnership can be dissolved in a number of ways:
- automatic dissolution under s.32(a) and (b) PA 1890 (expiry of fixed term/completion of specific venture), s.33 PA 1890 (death or bankruptcy of partner) or s.34 PA 1890 (if the partnership business becomes unlawful). The provisions of ss.32 and 33 are subject to contrary agreement;
- dissolution of partnership at will (i.e. with no fixed duration) by notice from any partner (ss.26 and 32(c)); and
- dissolution by the court as a last resort under s.35 PA 1890.
If an event occurs which causes a partnership to be dissolved, the partnership relationship ceases and any partner may demand that the assets of the business are realised.
Winding up partnership: Collecting in/distributing assets (s.44 PA 1890)
Subject to any written partnership agreement, where a partnership is wound up, once all debts and liabilities have been paid, any money/assets left will be distributed so that each partner is paid back his/her original capital first (s.44(b)(3)). It is common for a partnership agreement to have a provision dealing with the proportion in which any surplus assets are to be shared out following dissolution. This is called the asset surplus ratio or ‘ASR’. If there is no agreed ASR then s.44(b)(4) applies and surplus assets are shared in accordance with the agreed profit sharing ratio PSR. If there is no PSR then they are shared equally in accordance with s.24(1) PA 1890.