The LLP regime was set up in 2001 to provide some protection to the personal assets of the individual partners in the event of the insolvency of the partnership, whilst at the same time retaining the tax advantages of a traditional partnership.
Limited Liability Partnerships
The owners of an LLP are called members and have limited liability for the LLP’s debts in much the same way as the members of a limited company are not liable for the debts of the company. LLPs also have the same rescue/insolvency options as limited companies. However, there are some very important differences in the insolvency provisions – and in particular Section 214(A) of the Insolvency Act 1986 which provides for a claw-back of partners’ drawings in prescribed circumstances. This section corresponds to the wrongful trading provisions applicable to directors of limited companies, but is in our opinion likely to have a much greater impact. We recommend that partners of LLPs seek advice as soon as possible when the LLP is facing financial distress.
Traditional Unlimited Liability Partnerships
Unless the individuals are members of a Limited Liability Partnership, the partners have joint and several liability in respect of the partnership’s debts, and in the event the assets of the partnership are insufficient to meet its liabilities, creditors may pursue some or all of the Partners personally.
Partnership Administration Order (“PAO”)
One option to rescue a partnership is to apply to Court for a PAO. The Court has to be satisfied that the partnership is unable to pay its debts and will only consider granting an Order if one of the following can be achieved:
- The continued trading of the partnership as a going concern
- Agreement to a Partnership Voluntary Arrangement (“PVA”)
- Great asset realisations than would be possible under a winding up process
Should such an Order be granted then an Administrator is appointed who will then take control of the business. Creditors cannot continue or commence any legal process without the leave of the Court. The role of the Administrator is to then work with the partners to restructure the debt and rescue the partnership business which could be via a PVA.
Partnership Voluntary Arrangement (“PVA”)
An important rescue procedure for an unlimited liability partnership is a PVA. In essence, a PVA will replace the terms of the partnership’s existing contracts with its creditors (e.g. to pay an invoice within 30 days) with new terms as set out in the PVA proposal. For example, the proposal might require the partnership to pay a fixed monthly sum into the arrangement for a period of three years so that creditors receive a minimum dividend. It is important to remember that the proposal must demonstrate that creditors will achieve a better outcome compared to the winding up of the partnership and bankruptcy of its partners. A PVA may be used as a stand-alone procedure, or it may be supported by the Individual Voluntary Arrangement (“IVA”) of the individual partner. As with any procedure of this type, there must be an underlying viable business. Where it is not possible to implement a PVA, a partnership may be wound up by the Court. This may also lead to the bankruptcy of some or all of its individual partners.
Winding up of a Partnership
The process to wind up an unlimited partnership via a Court petition is very similar to that of a limited company being placed into compulsory liquidation. A creditor can serve a statutory demand and if it is not complied with, proceed to petition for the Bankruptcy of the partners. With a partnership, it is however essential to ascertain where the assets and liabilities sit. This is because any partnership assets that are realised for the benefit of creditors must be allocated against those liabilities first. Any shortfall therefore will then transfer to the personal estates of the partners. At CVR we have a significant amount of expertise in advising Partnerships. Please contact your local Partner for further information.
For further information about Partnership Insolvency, please contact your local office Partner.