Partnership governance - Dissolution and sale as a going concern

Learning Outcomes

After reading this article, you will be able to identify and explain the statutory triggers for partnership dissolution under the Partnership Act 1890, describe the legal consequences for partners, outline the process for winding up partnership affairs, and analyse the main legal considerations when selling a business as a going concern, including asset transfer, liability, and employee rights. You will also be able to apply these principles to SQE1-style problem scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the legal framework for partnership dissolution and the sale of a business as a going concern. In your revision, focus on:

  • The statutory triggers and procedures for partnership dissolution under the Partnership Act 1890
  • The legal consequences of dissolution for partners, including authority, liability, and asset distribution
  • The process and legal considerations for selling a business as a going concern, including asset and liability transfer
  • The impact of employment law (TUPE) on employee rights in a business sale
  • The practical steps for winding up partnership affairs and notifying third parties

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 is the legal process by which a partnership comes to an end. The Partnership Act 1890 sets out the main triggers for dissolution and the statutory procedures that follow. Understanding these rules is essential for SQE1, as they determine when a partnership ceases to exist and how its assets and liabilities are dealt with. In practice, dissolution often leads to the sale of the business as a going concern, where the business is transferred to a new owner who continues its operations. This raises important legal issues, including the transfer of assets, allocation of liabilities, and the protection of employee rights.

Statutory Triggers for Dissolution

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

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

  • 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)).
  • Death or Bankruptcy: The partnership dissolves automatically if any partner dies or is made bankrupt, unless the agreement provides otherwise (s. 33(1)).
  • Court Order: The court may order dissolution in cases such as permanent incapacity, prejudicial conduct, or deadlock (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.

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).
  • 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).
  • Liability for Debts: Partners remain jointly liable for debts incurred while the partnership existed. Creditors can pursue any partner for the full amount.
  • Notification to Third Parties: Notice of dissolution should be given to clients, suppliers, and other third parties to avoid ongoing liability for new obligations.

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

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).
  • Step 3: Repay partners’ capital contributions.
  • Step 4: Distribute any remaining surplus among the partners according to their profit-sharing ratios.

If the assets are insufficient to pay all debts, partners must contribute equally to cover the shortfall, unless the partnership agreement states otherwise.

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.

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.

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.
  • Liabilities: The buyer and seller must agree on who is responsible for existing debts and obligations.
  • Assignment of Contracts: Customer, supplier, and lease agreements may need to be assigned, often requiring third-party consent.
  • Employee Rights: Employees usually transfer to the new owner under the same terms, protected by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).

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

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. Dismissals connected to the transfer are generally void unless there is an economic, technical, or organisational reason.

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.

Practical Steps on Dissolution and Sale

  • Valuation: Partners should agree on how to value assets and goodwill.
  • Due Diligence: The buyer should review the business’s financial and legal position.
  • Assignment of Contracts: Ensure all necessary consents are obtained for transferring leases and key agreements.
  • Notification: Inform all stakeholders (employees, clients, suppliers) of the dissolution and sale.

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.

Key Point Checklist

This article has covered the following key knowledge points:

  • The main statutory triggers for partnership dissolution under the Partnership Act 1890
  • The legal consequences of dissolution for partners, including authority and liability
  • The process for winding up partnership affairs and distributing assets
  • The meaning and legal implications of selling a business as a going concern
  • The application of TUPE to employee rights in a business sale
  • The practical steps required to complete a dissolution and sale

Key Terms and Concepts

  • dissolution
  • partnership at will
  • winding up
  • going concern
  • TUPE
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Senior Associate at Trilegal