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Dissolution of Partnership Businesses

Mek H. Kamongmenan is a senior tutor of law at the School of Law, University of Papua New Guinea, and a lawyer.

The most common task which solicitors are called upon to perform, the preparation of the partnership agreement, is to advice on the many problems relating to dissolution. Few clients have any knowledge of the formalities involved especially in the usual case where the partnership is for an indefinite terms. The threat of dissolution of a successful partnership business is often used as a weapon in an effort to resolve disputes between partners.

Most agreements are unable to fix a term for the duration of the partnership as it is intended that it should continue indefinitely so long as the business is successful. In such a case any partner may (unless that right is specially negated by the partnership agreement) dissolve the partnership by giving notice of intention to do so, or of retirement, to all other partners. If the original agreement was by deed, notice should be given in writing under the land of the partner giving it. It is advisable to give written notice in all cases irrespective of whether the original agreement was oral, in writing or by deed.

Sometimes it is found that the partnership deed provides that the partnership is determinable only by the mutual consent of all the partners, this is not recommended, as it constitutes a partnership for a fixed but indefinite term, namely the joint lives of the partners. Problems may arise once the partners are in continual disagreement and to perpetuate such a situation would prove disastrous, although it is doubtful whether any attempt to oust the jurisdiction of the court to dissolve the partnership on the just and equitable ground, most frequently invoked in just such situation would be valid.

In advising on a dissolution one should firstly look to the terms of the partnership agreement (if any) as if a procedure is there set out it should be complied with, e.g. six months-notice mat be required to be given. Subject to any such conditions, where a partner gives notice to dissolve the partnership and dissolution takes place from the date for dissolution stated in the notice, or, if not date is stated, from the date of the communication stated in the notice. Service of the notice should be in accordance with the agreement and if there is no such provision, then in accordance with land.

Where the agreement does not permit a partner to give a notice of dissolution until a further time or the happening of a future event, an application can nevertheless be made to the court for an order upon any of the grounds set out in the Partnership Act. The court has a fairly wide discretion in the matter as it is called upon to decide as to what are basically questions of fact. As a matter of procedure, it is better to apply for the order on one or more of the specific and definite grounds made available by the e.g. consistent breach of the partnership agreement, as if such a ground is available the task of providing satisfactory evidence can be made easier. The provisions of the Act are very wide in their terms are they apply where any circumstances have arisen which in the opinion of the court render it just and equitable that the partnership be dissolved. This ground is more appropriate to a situation where the continuation of the partnership business would be impracticable because the partners have reached a state of deadlock.

It is advisable to examine carefully the financial statements relating to the partnership business and to ascertain that liabilities can be properly discharged. If there are current accounts such as a account with another business for goods continually supplied, notice should be given to such creditors of the dissolution so that a partner cannot increase the joint liabilities such as those, which may exist under a lease or mortgage. In the case the whole of the principal sum might become immediately due and payable if interest payments are not continued to be made. These matters should be considered so that if possible a satisfactory arrangement can be arrived at between the partners, which will in orderly dissolution without undue hardship being caused to any partner.

Following the dissolution of a partnership, problems will almost certainly arise in the division of the assets. The following points may be of assistance in dealing with such a situation:

a: First check the terms of the partnership agreement as it may contain provisions such as, for example, the distribution of assets in specific terms;

b: The method of valuation of goodwill can be complex due to the abstracts nature of this asset and the fact the parties are in disagreement could substantially destroy the goodwill built up during the term of partnership. The court, as a matter of practice, will not of itself suggest a method by which this asset should be valued and the court endeavours to prevail upon forward by the partner to reach some form of agreement, failing which of the partners will have the difficult task of convincing the court that the particular method put forward by the partner is fair and equitable having regard to all the circumstances and the objections of the other partners. It is not unusual for this problem to take a long time to be satisfactorily resolved. It is best for a solicitor acting to have all parties agree to the appointment of an independence expert whose decision is final and binding. In preparing the partnership agreement every effort should be made to include a method of assessing the value of goodwill and other assets on a dissolution or a winding up.

If a solicitor is acting for all parties, the interview in which instructions are taken for the agreement can be quite an experience. As each party attempts to device a method of purchasing the asset at the lowest possible price and then abandons the idea when the party discovers that it could also be used by one of the other parties. If you think about it, it is hard enough when the partners are in agreement and are anxious to co-operate, imagine how impossible the problem becomes on a dissolution when they are antagonistic towards each other.

If provision is made for a partner to purchase the goodwill at an agreed valuation, a covenant should be included to prevent the remaining partners from carrying on a similar business in competition within a reasonable period.

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c: If an agreement cannot be reached as to be reached as to the form which the accounts should take an application must be made to the court to wind up the business and the affairs of the firm;

d: The property of the partnership must be realized if it is impracticable to divide the asset in accordance with specific terms, or if agreement on such a division cannot be reached. If the partnership can be sold as a going concern, an early conference should be held between partners and their legal advisers in an effort to reach agreement for one or more of the partners or some other person to continue to run the business until sale. In such a situation it is customary for an agreement to be drawn up to cover such items as distribution of subsequently incurred liabilities, as the carrying on of the business does not fall within the terms of the former partnership arrangement, which has been dissolved.

Any partner can approach the court for a direction as to the manner and place of the sale of a partnership asset and the court will have regard to what is best for all the partners. The court may appoint a receiver and manager to effect the sale.

e: Following the sake of the partnership business, notices should be given and published to avoid the possibility of further liability.

f: Setting of accounts between partners s governed by the Act, subject to the terms of the partnership agreement. The Act only provides an order for the payment of the losses and the other in which the assets of the firm should be applied. The ultimate residue in either case is divided among the partners in the proportion of their entitlements to profits. If should be remembered that profits are divided equally irrespective of capital contributions in the absence of satisfactory evidence of agreement to the contrary.

G:When dissolution takes place by agreement, if the partnership was created by a deed, a deed should set the terms of dissolution. For a precedent, which deals with the matters, which would generally have to be covered, See Higgins & Fletcher, The Law of Partnership in Australia and New Zealand pp 368-370.

From the foregoing it can be seen that the general procedure on dissolution is for assets for the firm to be realized, debts and liabilities to be paid, and surplus assets distributed the partners after deducting any money which may be due by them as partners to the firm, e.g. where a partner has not paid a call on capital.

In many professional partnerships, (e.g. Lawyers, Accountants or Medical practitioners) the parties may wish to incorporate or establish a practice company, administration company or a service company or the equivalent in a trust. The effect of such entities is that a considerable part of what would otherwise be income of partnership would be considerable part of what would otherwise be income be of the partnership would be diverted to such entity or assets, which would otherwise belong to the partnership, will be owned by such entities. Unless the dissolution provisions of the partnership agreement take such matters into account they will be ineffective to bring about the intended result.


Larry Rankin from Oklahoma on April 11, 2018:

Helpful advice!

Mary Norton from Ontario, Canada on April 05, 2018:

It is quite a process to dissolve partnerships. I suppose in the case of law, management, and financial partnerships, the partners incorporate so their income is favourably taxed.

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