4 Distribution of assets.Section 44 applies and if the
assets when realised are sufficient to satisfy all claims,
payment is made first to outside creditors, both secured
and unsecured. Then each partner is paid what is due to
him as advances or loans, as distinct from capital. The
costs of the winding-up are then paid (Potterv Jackson
(1880)). Then each partner is paid the amount of capital
due to him; any surplus is divided between the partners
in the profit-sharing ratio.
If there are insufficient assets to pay outside creditors
and the partners’ entitlements, s 44(a) applies and the
partners have to make good the deficiency in the profit
and loss-sharing ratio.
The insolvent partnership
The Insolvent Partnerships Order 1994 (SI 1994/2421)
came into force on 1 December 1994. It revokes and
replaces the Insolvent Partnerships Order 1986 (SI 1986/
2142). It provides a code for the winding-up of insolvent
partnerships and introduces two new procedures, i.e.
voluntary arrangements and administration orders for
insolvent partnerships. The main provisions appear below.
References to Articles and Schedules are references to
Articles in and Schedules to the Order.
Voluntary arrangements
Article 4 and Sch 1 introduce the rescue procedure of a
voluntary arrangement into partnership insolvency. The
members of an insolvent partnership make a proposal to
the firm’s creditors for the settlement of its debts by a
binding voluntary arrangement. Part I of the Insolvency
Act 1986 (company voluntary arrangements) is applied
with appropriate modifications as set out in Sch 1.
Insolvent members of the firm may under Art 5 make
use of the voluntary arrangement provisions of Part I of
the 1986 Act (if corporate members of the firm) or Part
VIII (if individuals).
Administration orders
Article 6 and Sch 2 provide for the appointment by the
court of an administrator who can put proposals to
creditors for the survival of the firm or a more advantage-
ous realisation of its assets by applying Part II of the
1986 Act (Administration orders) with appropriate
amendments for partnerships as set out in Sch 2. An
application to the court must be presented by the mem-
bers of the insolvent partnership or by a creditor or
creditors or by all of those parties together or separately.
The partners may appoint an administrator without
going to the court (see below).
A partnership may qualify for administration even
though one of the partners is solvent. It is a requirement
of administration that the partnership is unable or likely
to become unable to pay its debts. If one of the partners
is solvent then under the joint and several liability rule
that partner is liable to pay the debts and liabilities of the
firm. How does this affect administration? The matter
was raised in the following case.Part 2Business organisations
132
Re H S Smith and Sons(1999)H S Smith and Sons was a family farming partnership
comprising Harry Seabrook Smith, Frances Smith and
their son Ivan Smith. The firm was unable to pay its
debts and applied to the court for an administration
order. The application stated that the appointment of an
administrator would be likely to achieve the survival of
the firm. However, the difficulty was that under the rule
of joint and several liability of partners for the debts of
the firm Harry Smith could comfortably afford to pay off
the firm’s debts. Did this prevent the court from making
an administration order?
The court has a discretion whether or not to make
such an order and the judge exercised that discretion
by making the order. Although the creditors would have
had full recourse against Harry Smith, the firm itself was
unable to pay its debts. The making of the order would,
said the judge, hold off creditors from petitioning the
court to wind up the firm and give Harry Smith time to
recapitalise the partnership. In this way the business
would survive as a going concern.As a result of amendments to the Insolvent Partner-
ships Order 1994, partnerships can use the out-of-court
appointment of administrators procedure set out in
amendments made to the Insolvency Act 1986 by the
Enterprise Act 2002. The partners or a majority of them
are able to use the out-of-court route into administra-
tion in addition to the route into administration by
means of a petition to the court for an administra-
tion order. They also have the advantage of the revised
purpose of administration which gives primary weight
to rescuing the partnership as a going concern. The out-
of-court procedure mirrors that for corporate appoint-
ments set out in Chapter 6.