Partnerships – distribution of assets on dissolution

When a partnership is dissolved, each partner’s authority will continue for the purposes of winding up its affairs.

An account of partnership dealings and transactions must be kept open following dissolution until the partnership is wound up.

Profits realised following the dissolution will be shared in normal profit sharing ratios unless some special allowance is given to a particular partner by the court.

Subject to any contrary agreement, the rules which govern the final settlement of a partnership account on dissolution are contained in section 44 of the Partnership Act 1890 which states:

‘In settling accounts between the partners after a dissolution of partnership, the following rules shall, subject to any agreement, be observed:

• Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits:
  
  
• The assets of the firm including the sums, if any contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following manner and order:

1. In paying the debts and liabilities of the firm to persons who are not partners therein:
   
   
2. In paying to each partner rateably what is due from the firm to him for advances, as distinguished from capital:
   
   
3. In paying to each partner rateably what is due from the firm to him in respect of capital:
   
   
4. The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible.

Partners are required to proceed through each of the four stages in turn, and to identify whether there is a deficiency of assets at any of the first three stages. If there is, that deficiency is treated as a loss and borne by the partners as such.

If there is an ultimate residue to be divided between the partners at stage 4, the relevant profit shares will be those applied to residual or capital profits. Any form of preferential profit share which is only applicable to profits of an income nature, such as ‘salaries’, ‘bonus shares’ or ‘incentive profit shares’ must be left out of the account.

Where partners have contributed capital in unequal proportions but share profits and losses equally, any loss of capital shall be shared equally in the same way as any other loss.

Principles which apply as between partners:

• Each partner is entitled to have the partnership property applied in liquidation of the partnership debts, and to have any surplus assets divided
  
  
• Each partner is, in general, entitled to force a sale of all partnership assets which are capable of being sold and to have the value of any unsaleable asset brought into account by the partner who retains it
  
  
• Save in special circumstances, no partner can insist on taking the share of any other partner at a valuation or to insist on a division of the partnership assets in specie
  
  
• No partner can retain the exclusive right to any increase in the value of the partnership assets between dissolution and sale, but more difficult questions may arise in relation to trading profits realised during that period
  
  
• Both the authority of each partner and the duties which he owes to the other partners continue whilst the partnership affairs are being wound up
  
  
• Each partner can insist that no further business is transacted or acts done, otherwise than with a view to the winding up
  
  
• In the absence of some contrary agreement, the right to wind up the partnership affairs does not fall on any particular partner to the exclusion of the others. If any dispute arises, the winding up should proceed under the supervision of the court.
  
  
• The right to wind up the partnership affairs is, however, personal to the partners, so that the representatives of a deceased, insolvent or mentally disordered partner will not normally be permitted to interfere
  
  
• A return of premium may be ordered if the partnership was dissolved prior to the expiration of a fixed term
  
  
• If, on settling the final account, the partnership assets are insufficient to pay the partnership debts, or to repay the sums due to each partner in respect of advances or capital, the deficiency must, subject to any contrary agreement, be made good by the partners in their profit sharing ratios
  
  
• Although interest on capital is not normally payable following a dissolution, a partner’s capital contribution may carry any income attributable thereto
  
  
• Unless that right is excluded by agreement, each partner is entitled to give notice of the dissolution and, where appropriate, to prevent his former co-partners from continuing to hold him out as a partner by using the old firm name
  
  
• Once the winding up is complete, each partner will, in general, be entitled to start up a business of the same nature as that carried on by the dissolved firm, either alone or in partnership with others