Dissolution of Partnerships
The dissolution of an existing partnership can be effected in many ways. In the absence of other arrangements, the dissolution of a partnership should be followed by a winding up and final settlement of accounts. However, many partnership agreements contain provisions to enable the transition without a formal winding up. A partnership may be dissolved in the following ways;
Operation of law
A partnership can be dissolved by any event which makes it unlawful for the business to carry on or for the members to carry on in partnership.
Agreement of the partners
This is where the partnership is dissolved subject to an agreement between the partners. This can be evidenced where a partnership agreement:
- Is for a fixed term and that term expires
- Is for a single undertaking, which is completed
- Is for an undefined time, and a partner gives a notice of their intention to dissolve the partnership, as long as it is not a condition that the partnership be terminated by mutual agreement only
- By the death, bankruptcy or insolvency of a partner
- At the option of the other partners
In accordance with the provisions of the partnership agreement
This is where the partnership agreement provides ways for it to be dissolved.
Court application
On application by a partner the court may order a dissolution of the partnership in the following cases:
- When a partner has been declared to be of unsound mind and incapable of managing their affairs
- When a partner becomes permanently incapable of performing their part of the contract
- When a partner has been engaged in conduct that prejudicially affects the carrying on of the business
- When a partner commits a breach of the partnership agreement
- When the business of the of the partnership can only be carried on at a loss
After the dissolution of the partnership, the outgoing partners still possess certain rights. When a partnership is dissolved by a change of membership with the remaining partners continuing the business and there has been no final settlement of accounts with the outgoing partner then he or she is entitled to certain payments. The outgoing partner is entitled at their option to either a share of the profits of the business made since dissolution which is attributable to their share of the partnership assets or interest on their share of the partnership assets.
This provision for payments for a share of profit or interest does not apply where the sole purpose of the partnership business operating is to wind up the affairs of the partnership. Further, this provision does not apply where arrangements have been made in the partnership agreement for dissolution if these arrangements are carried out. This is generally evident where provisions in the partnership agreement allow for rights of the continuing partners to purchase the interest of the outgoing partners. If a partner exercises their option under the partnership agreement they must comply with all the terms of the option, otherwise they may be liable to account for the outgoing partners’ share in profits or interest.
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