344 Chapter 12Partnership, limited liability partnership and choice of legal status
example, the deed might state that the firm is to run for a fixed period. If this is the case,
the partnership will be dissolved when that period expires or if all the partners agree to
dissolve it before the fixed time has expired. If a partnership is not for a fixed time, it is
known as a partnership at will, and any partner may dissolve it by giving reasonable notice
of an intention to leave the firm. The death or bankruptcy of a partner will also cause the
firm to be dissolved. A partnership will be dissolved by the court in several circumstances,
the two most important of which are that the firm can only be carried on at a loss, or that
the court considers it just and equitable to wind the firm up.
Sometimes, a dissolution of a partnership is little more than a technicality and does not
lead to a full-scale winding up. For example, when a partner leaves a large firm of solicitors,
the firm is technically dissolved and a set of accounts will need to be drawn up. However,
the other partners will generally then carry the business on much as before. When a firm
is wound up it is permanently finished. After a winding up, the authority of the partners
to bind the firm remains only in so far as this is necessary to effect the most beneficial wind-
ing up. The firm’s assets will be gathered in, and the goodwill of the firm may well be a
valuable asset.
A firm is solvent if it can pay all of its debts. The mere fact that the firm has made a loss,
and therefore lost some of the capital contributed by the partners, will not necessarily make
the firm insolvent. If the firm is solvent when it is liquidated payments are made in the
following order:
n First, all outsiders will be fully paid what they are owed.
n Second, loans made by partners will be repaid.
n Third, the partners will be repaid the capital which they contributed to the firm. If there
is not enough capital to repay all of the partners, the partners must contribute to the
lost capital in the same proportion as they were to share profits (unless they had agreed
otherwise).
n Finally, any surplus will be paid to the partners in the ratio in which they were to share
profits.Example
Firm RST is wound up. The three partners, R, S and T were to share profits equally. R con-
tributed £30,000 capital, S contributed £20,000 and Z contributed £10,000. (Total £60,000.)
The partners made no loans to the firm. If, after all the creditors had been paid, there was a
loss of capital of £12,000, each partner would have to contribute to this equally. They would
all therefore contribute £4,000. R would therefore receive £26,000 (£30,000 – £4,000);
S would receive £16,000 (£20,000 – £4,000); T would receive £6,000 (£10,000 – £4,000.) If
after all the creditors had been paid, there was enough to repay all of the capital and £66,000
was left over, each partner would receive £22,000 and full repayment of their capital.The firm will be insolvent if it does not have enough assets to pay its debts. Section 44(a) of
the Partnership Act 1890 provides that losses must 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 to share profits. When a firm is insolvent, it may well be that one or more of the
partners remain solvent. If more than one partner is solvent, the solvent partners have to
repay the firm’s debts in the proportion in which they were going to share profits. If some