Having trouble getting paid by a partnership?

If your business is owed money by a partnership, and previous efforts to recoup the debt have failed, you may now be considering what to do next. Although businesses that are owed money by a partnership have several options, insolvency and bankruptcy procedures are not necessarily debt recovery remedies.

Graeme Weir, Head of the Debt Collection department at Thackray Williams Solicitors, advises on the options and costs of recovering debts from a partnership.

The costs of winding up a partnership or petitioning partners’ bankruptcies are high and can mean that the dividends for unsecured creditors are very small or nothing at all. As the nature of the debt and the circumstances of the partnership and its partners can vary widely, it is always wise to seek specialist legal advice before embarking on this course of action.

Because a partnership is an unincorporated business structure, the partners are equally liable for the debts of the partnership. This liability is normally unlimited, which means that as a creditor you can pursue not only the partnership itself, but also one or more of the individual partners. Partners do not need to be individuals – they may also be companies, known as corporate members.

The business structure of a partnership gives you a number of options over the action you can take:

• the partnership can be wound up as an unregistered company, while no action is taken against the individual partnerships;
• the partnership can be wound up as well as presenting bankruptcy petitions against one or more of the partners; or
• because partners are personally liable, you can apply for the bankruptcy of one or more partners without seeking to wind up the partnership itself.
• you could alternatively pursue the individual’s partner’s personal assets. This may include placing a charge over their residential properties, (if owned) before seeking a sale order over it, to discharge both the debt and costs of the exercise. A helpful tool in a rising or stable housing market.

A key point to note is that, if there is any kind of dispute over the debt, you are unlikely to be able to wind the partnership up or make individual partners bankrupt until this is resolved.

Winding up the partnership

The advantage of the first option, pursuing the partnership only, is that this option leaves the individual partners free to be able to trade in other businesses to generate profits that can be used in settlement of the debt. If the partnership has a substantial amount of debt and little by way of assets, you may find that you do not receive much (if any) of your money back through the winding up process.

A partnership will be unable to pay its debts if one of the following applies:

• a statutory demand has been served and remains unpaid;
• an action or proceedings has been started for a debt against either a member of the partnership or the partnership itself, or written notice of proceedings in relation to a sum due has been served on the partnership or member, and no payment has been forthcoming;
• execution of a judgment against the partnership has been returned unsatisfied;
• it is demonstrated to the court that the partnership is unable to pay its debts; or
• the court is satisfied that the partnership’s liabilities outweigh its assets.

Pursuing individual partners via a bankruptcy petition

Individual partners are deemed to be unable to pay their debts if:

• the partnership owes more than £750;
• a statutory demand has been served on both the partnership and the individual partners; and
• the payment has not been forthcoming within three weeks.

If you pursue the individual partners, the only ground upon which the partnership can be wound up is if it is unable to pay its debts. This may be a viable option if, for example, the partnership seems likely to be able to resolve its financial difficulties in the future.

Pursuing both individual partners and the partnership

If you decide to wind up a partnership and make the partners bankrupt, the court will deal with the winding up petition before the individual bankruptcies.

If you are considering this type of action you should note that insolvency procedures could mean that recovery of the unpaid debt becomes less, rather than more, likely. The costs involved could also be substantial. As a result, it is vital to seek specialist legal advice on the partnership and nature of the debt involved before embarking on this course of action.

The most appropriate means of pursuing the partnership depends on the nature and extent of the debt, as well as the financial and business circumstances of the individual partners.

For advice on the best way to recover debts owed to your business in the most efficient and cost-effective way possible contact Graeme Weir.