Partnership Insolvency

The media thankfully appears to be less filled with tales of doom and gloom about the recession and is beginning to cautiously suggest that there may be a light at the end of the tunnel for many business owners within the UK. However, this certainly does not mean that we can become complacent. It is vital that all business owners maintain a realistic view of their firm’s finances, taking early action should figures begin to show an unfavourable trend.

Partnerships, by their very nature, are fraught with risk, with the partners each capable of having a significant effect on each other and the partnership as a whole. For example, a partner (or even a partner’s spouse) could encounter personal financial difficulty and lose their home, which may have been put up as security on a bank loan for the company. Alternatively, a partner could demand that the partnership pay the debt on an outstanding County Court Judgement, being perfectly entitled to petition to wind up the partnership, should the debt not be paid.

It is therefore vital that you seek legal advice before agreeing to enter into a partnership.

If, as a partnership, you work consistently at the top end of your overdraft, are regularly borrowing money from the bank or are writing cheques without funds being made available, then your bank will begin to have concerns about your potential partnership’s insolvency. If your cashflow is unable to cope with payments due, or the partnership owes more than it owns then it may be that you are, in fact, insolvent and you must seek professional advice immediately, to avoid court action.

Consequences of Bad Debt

If you owe money, then you and your partners can propose a Partnership Voluntary Arrangement (PVA) to settle the debts with your creditors. If individual partners are unable to pay off the debts or agree to an Individual Voluntary Arrangement (IVA), then they will become subject to personal bankruptcy, although your remaining partners may continue trading. Similarly, however, as discussed earlier on in this article, this also means that a creditor may still pursue the other partners for the outstanding debt.

As a result of bad debt a bank / creditor could potentially file for:

  • One of the partners to be made bankrupt without the partnership having to be wound up
  • To have the partnership wound up without necessarily taking any further legal action
  • To have the partnership wound up and make one or more of the partners personally bankrupt at the same time

In the event of partnership insolvency, it is much preferable to allow a partnership to be wound up by a liquidator rather than by its creditors, as it will then become evident that the partners have not acted in the best interest of their creditors, possibly resulting in the business being accused of wrongful trading, attracting substantial fines and disqualification from running other businesses for up to 15 years.

In a limited liability partnership, however, the process is more akin to that of regular company insolvency, with perhaps a company voluntary arrangement (CVA) being filed. Professional advice should be sought in all instances.

Partnership insolvency is a real concern for many SMEs. The key to avoiding personal liability, legality and ultimately, bankruptcy, is early identification of financial difficulties and immediate action.

How Touch Financial Can Help

Ring Touch Financial on 0845 388 9725 or simply complete one of our online quote forms. We may be able to help you avoid your partnership’s insolvency by securing additional borrowing from our panel of carefully selected lenders, raise funds by selling off some of the more valuable business assets or release some of the cash tied up in unpaid customer invoices.

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