Partnership governance - Dissolution and sale as a going con...

Learning Outcomes

This article outlines partnership dissolution and sale as a going concern, including:

• Statutory triggers for partnership dissolution under the Partnership Act 1890 (expiration, completion of venture, notice in a partnership at will, death or bankruptcy, illegality, and court-ordered dissolution)
• Distinction between dissolution, retirement, and reconstitution; outgoing partner liability for future debts (s.36 notice and London Gazette advertisement) and risks of holding out
• Legal consequences of dissolution for partners, including limitation of authority to winding up (s.38) and continuing liability absent proper notice
• Settlement-of-accounts rules (s.44) for asset and loss distribution, including priority of external creditors, repayment of partner advances (and interest), capital, and sharing of any surplus by profit ratios or equally
• Legal considerations in a sale as a going concern: transfer of goodwill, assignment/novation of contracts, sale of stock and fixtures, book debts, lease transfers, and allocation of liabilities
• TUPE 2006 and employee transfer: automatic transfer, continuity of terms, information and consultation duties, and economic, technical or organisational (ETO) reasons for changes
• Practical steps to wind up partnership affairs and plan a sale: valuation of goodwill, notifications to third parties, managing consents, and employee engagement

SQE1 Syllabus

For SQE1, you are required to understand partnership dissolution and sale as a going concern, with a focus on the following syllabus points:

• Triggers and formalities of dissolution under the Partnership Act 1890 (ss.26, 32–35, 36).
• Legal effects of dissolution: partner authority for winding up (s.38), notice requirements to avoid future liability (s.36), and risks of holding out (s.14).
• Settlement of accounts and distribution of assets and losses on dissolution (s.44), including treatment of partner advances and capital.
• Sale as a going concern: transfer of tangible and intangible assets (including goodwill and the firm name), assignment and novation of contracts, and liability allocation.
• TUPE 2006: automatic transfer of employment, ETO reasons, information and consultation, and potential protective awards for non-compliance.
• Practical steps for winding up and sale: valuing goodwill, notifying creditors and clients (including London Gazette), securing consents, and updating registrations.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Under the Partnership Act 1890, what are three events that can trigger the dissolution of a partnership?
2. After dissolution, what authority do partners retain to bind the firm?
3. When a business is sold as a going concern, what happens to the employees’ contracts under TUPE?
4. How are partnership assets distributed on dissolution if there is no partnership agreement?

Introduction

Dissolution brings a partnership to an end and triggers the winding up of its affairs. The Partnership Act 1890 provides both the grounds on which dissolution occurs and the framework for settling the partnership’s accounts. Dissolution is a legal status change: it stops the ordinary business in its tracks and narrows partners’ authority to what is strictly necessary to finish existing transactions and realise assets. In practice, a dissolved partnership may either liquidate assets piecemeal or sell the business as a going concern to achieve better value. A sale raises practical and legal issues: which assets transfer, how liabilities are handled, how contracts move (assignment or novation), and how employee rights are protected under TUPE when the business continues under new ownership.

Key Term: dissolution
The legal termination of a partnership, resulting in the winding up of its affairs and the end of the partnership relationship.

Statutory Triggers for Dissolution

A partnership may be dissolved in several ways under the Partnership Act 1890.

• Expiration of a Fixed Term: If the partnership was formed for a set period, it dissolves automatically at the end of that period (s.32(a)).
• Completion of a Single Venture: If the partnership was created for a specific project, it ends when the project is completed (s.32(b)).
• Notice by a Partner: In partnerships with no fixed term (“partnership at will”), any partner can dissolve the partnership by giving notice to the others (s.26, s.32(c)). Notice is effective from the date stated or, if none, from the date given; there is no statutory minimum period, but reasonable notice avoids dispute.
• Death or Bankruptcy: The partnership dissolves automatically if any partner dies or is made bankrupt, unless the agreement provides otherwise (s.33(1)).
• Illegality: The partnership is dissolved if its business becomes unlawful (s.34).
• Court Order: The court may order dissolution in cases such as permanent incapacity, wilful or persistent breach of the partnership agreement, prejudicial conduct, deadlock, or where the business can only be carried on at a loss (s.35).

Key Term: partnership at will
A partnership with no fixed term, which can be dissolved at any time by notice from any partner.

A partnership agreement can modify many default rules (for example, continuing the firm on a partner’s death or setting agreed grounds for expulsion), but cannot prevent dissolution for illegality or compel partners to carry on a loss-making business indefinitely.

Legal Effects of Dissolution

Dissolution has several immediate legal consequences for the partners and the business.

• Authority of Partners: After dissolution, partners’ authority is limited to actions necessary for winding up the partnership and completing unfinished transactions (s.38). New business cannot be undertaken in the firm’s name.
• Asset Distribution: Partnership assets are used to pay debts and liabilities. Any surplus is distributed among the partners according to the partnership agreement, or equally if there is no agreement (s.44). Advances by partners (loans distinct from capital) rank ahead of capital and attract statutory interest.
• Liability for Debts: Partners remain jointly liable for debts incurred while the partnership existed. Creditors can pursue any partner for the full amount (with contribution as between partners dealt with internally). Liability for torts committed in the course of partnership business can be joint and several.
• Notification to Third Parties: Notice of dissolution should be given to clients, suppliers, and lenders. Without proper notice, an outgoing partner may remain liable to persons who continue to deal with the firm in reliance on apparent membership (s.36 and s.14).
• Goodwill and Firm Name: Goodwill is an asset which can be sold; the right to use the firm name and represent continuity depends on the sale and terms agreed at dissolution.

Key Term: winding up
The process of settling the partnership’s affairs after dissolution, including collecting assets, paying debts, and distributing any surplus.

Key Term: holding out
A representation that a person is, or continues to be, a partner; if relied upon by a third party, it can make that person liable for firm debts (s.14 PA 1890).

Key Term: goodwill
The intangible value of a business arising from its reputation, customer relationships, and the ability to earn profits; it is a saleable partnership asset.

Outgoing partners must ensure actual notice is given to those who have previously dealt with the firm and publish notice in the London Gazette to protect against liability for future debts (s.36). Retaining the old stationery, website or signage listing an outgoing partner can amount to holding out.

Winding Up and Asset Distribution

The winding up process is governed by s.44 of the Partnership Act 1890.

• Step 1: Pay debts and liabilities to non-partners (external creditors).
• Step 2: Repay advances made by partners (loans distinct from capital contributions). Partners who have advanced money for partnership purposes are entitled to interest, typically at the statutory rate, ahead of capital.
• Step 3: Repay partners’ capital contributions.
• Step 4: Distribute any remaining surplus among the partners according to their profit-sharing ratios, or equally in the absence of agreement.

Losses are borne first out of profits, then capital, and if necessary by partners in proportion to their share of profits (or equally absent agreement). If the assets are insufficient to pay all debts, partners must contribute to cover the shortfall per s.44.

Worked Example 1.1

Scenario: Three partners, A, B, and C, have no written partnership agreement. The partnership is dissolved. The firm owes £12,000 to a supplier, and each partner contributed different amounts of capital. After paying the supplier, £6,000 remains.

Question: How is the remaining £6,000 distributed among A, B, and C? Answer:
Without an agreement, profits (and thus surplus assets) are shared equally. Each partner receives £2,000.

Partners should distinguish between “advances” and “capital”: a loan to the firm (advance) is repaid before capital and attracts interest; capital is the agreed investment in the partnership and is repaid only after external debts and partner advances.

Where goodwill is sold on dissolution, the proceeds form part of the partnership assets; if the business is not sold as a going concern, one or more partners may buy the right to use the firm name and contact list as part of goodwill.

Sale as a Going Concern

A business is sold as a going concern when it is transferred to a new owner who continues its operations without interruption. This is common when a partnership dissolves and the business is sold rather than wound up piecemeal. Selling as a going concern can increase value by preserving customer relationships, supplier terms, and employee continuity.

Key Term: going concern
A business that is transferred as a whole, allowing it to continue operating under new ownership.

Legal Considerations in a Sale

• Transfer of Assets: The sale agreement should specify which assets (tangible and intangible) are included—stock, equipment, leasehold interests, IP rights (trade name, domain, trademarks), book debts, records, and goodwill.
• Liabilities: Unless expressly assumed by the buyer, liabilities remain with the seller. The parties should carefully allocate responsibility for existing debts, tax, and warranty claims, and price the business accordingly.
• Assignment and Novation of Contracts: Many third-party contracts (for example, leases, supply agreements, and key customer contracts) cannot be transferred without consent. Assignment transfers rights; novation is needed to transfer both rights and obligations and requires the third party’s agreement.
• Employees: Employees usually transfer to the buyer under TUPE on their existing terms, with continuity of employment preserved.
• Restrictive Covenants: A seller may agree not to compete in the same market for a period to protect the goodwill sold, provided restraints are reasonable in scope and duration.

Key Term: novation
A tripartite agreement by which a contract with the seller is terminated and a new contract on the same terms is made between the buyer and the third party, transferring both rights and obligations.

Festooning the asset list and responsibilities in the sale agreement avoids later dispute. Sellers often warrant title to assets and the accuracy of information provided; indemnities may be given for specific liabilities the buyer insists the seller retains.

Worked Example 1.2

Scenario: A partnership dissolves and sells its retail business as a going concern. The buyer agrees to take over all employees and continue operations. The partners have outstanding supplier debts.

Question: Who is responsible for the supplier debts after the sale? Answer:
Unless the sale agreement states otherwise, the original partners remain liable for debts incurred before the sale. The buyer is only liable for debts they expressly agree to assume.

Employee Rights and TUPE

When a business is sold as a going concern, TUPE applies. Employees automatically transfer to the new employer with their existing terms and conditions, continuous service intact. Pension rights are carved out in specific ways, but the core terms of employment move across. Dismissals connected to the transfer are generally void unless there is an economic, technical, or organisational (ETO) reason entailing changes in the workforce (for example, a genuine redundancy linked to restructuring).

The transferor must provide employee liability information to the transferee and both parties must inform (and, where appropriate, consult) employee representatives about the transfer and proposed measures. Failure to inform and consult can result in protective awards.

Key Term: TUPE
Regulations that protect employees’ rights when a business is transferred to a new owner, ensuring continuity of employment and terms.

Exam Warning

TUPE applies even if the parties do not mention it in the sale agreement. Failing to comply can result in claims from employees for unfair dismissal or breach of contract.

Variations to employment terms because of the transfer are generally ineffective unless there is an ETO reason and the changes are genuinely for that reason rather than the transfer itself. If the buyer plans restructuring, consider whether proposed measures qualify as ETO and ensure consultation is carried out in time.

Worked Example 1.3

Scenario: A partnership is dissolved after one partner dies. The remaining partners wish to continue the business and buy out the deceased partner’s share.

Question: What must the remaining partners do to continue the business? Answer:
The partnership is technically dissolved, but the remaining partners can form a new partnership. They must value and pay for the deceased partner’s share, settle any outstanding liabilities, and update all registrations and contracts.

Worked Example 1.4

Scenario: D retires from a partnership at will, the firm continues with E and F, and later a supplier contracts with the firm believing D remains a partner because the firm’s website still lists D.

Question: Is D liable for the new debt? Answer:
D can be liable if the supplier reasonably relied on holding out (s.14). Proper s.36 notices to persons who had previous dealings and a Gazette notice should have been given, and the firm should remove references to D. If notice was not given and holding out occurred, D risks liability.

Worked Example 1.5

Scenario: A buyer acquires a food service partnership’s business and proposes to merge two kitchens, removing duplicate roles immediately post-transfer.

Question: Are the dismissals lawful? Answer:
Dismissals connected with a TUPE transfer are generally void unless there is an ETO reason entailing changes in the workforce. A genuine redundancy due to merging operations can be an ETO reason if proper consultation and fair redundancy procedures are followed.

Practical Steps on Dissolution and Sale

• Valuation: Agree a methodology to value assets and goodwill. Goodwill value often turns on sustained profitability, customer lists, brand, and systems.
• Due Diligence: The buyer should review financials, key contracts, tax, employment liabilities, and IP. Sellers should prepare clear asset schedules and liability disclosures.
• Assignment/Novation of Contracts: Identify which contracts require consent. Plan Lease assignments and novations early to avoid disruption.
• Notification: Inform stakeholders (employees, clients, suppliers, banks, insurers) of the dissolution and sale. For retiring partners, give actual notice to those who have dealt with the firm and publish in the London Gazette to cut off future liability (s.36).
• Authority and Winding Up: Use s.38 authority only for winding up and completing existing transactions. Close bank mandates, collect book debts, and settle external creditors before distributing surplus.
• Employment: Comply with TUPE information/consultation duties and consider ETO measures carefully.
• Tax and Records: Agree responsibility for pre-transfer tax liabilities and keep records of employee liability information, consent letters, and notices served.

Key Point Checklist

This article has covered the following key knowledge points:

• The main statutory triggers for partnership dissolution under the Partnership Act 1890, including illegality and court-ordered grounds.
• The legal consequences of dissolution for partners: limited authority for winding up (s.38), continuing liability for past debts, and the need for s.36/Gazette notice to avoid future liability.
• The process for winding up partnership affairs and distributing assets under s.44, including partner advances, capital, and surplus.
• The meaning and legal implications of selling a business as a going concern, including transfer of goodwill and contract assignment/novation.
• Allocation of liabilities on sale and the importance of explicit terms in the sale agreement.
• The application of TUPE to employee rights in a business sale, including automatic transfer, ETO reasons, and information/consultation duties.
• Practical steps to complete a dissolution and sale: valuation, due diligence, consents, notifications, and record-keeping.

Key Terms and Concepts

• dissolution
• partnership at will
• winding up
• going concern
• TUPE
• holding out
• goodwill
• novation