Partnership insolvency can often be likened to the financial equivalent of a train wreck, especially in the case of a conventional (non Limited Liability Partnership (“LLP”)) partnership. When a partnership fails, it is not only the partnership assets that are at risk, it is those of the partners themselves. In short, the level of financial destruction is devastating.
Unlike a company, there is no voluntary liquidation process available to a conventional partnership, although such an option is available to an LLP. The only options available are a compulsory liquidation, partnership administration or a partnership voluntary arrangement.
If a partnership is wound up compulsorily, it is usually accompanied by the bankruptcies of the partners. The process then involves the realisation of the partnership assets to meet the partnership liabilities and any shortfall is represented by the partners’ overdrawn capital accounts and their respective assets are realised to meet that liability.
In conventional partnership insolvency therefore, every partner’s assets are at risk as well as the assets of the partnership.
In the case of the insolvency of an LLP, the members do not share the same liability risk as partners of a conventional partnership. The shortfall in the assets of the partnership does not fall onto the individual members, except to the extent that there is a shortfall in any negligence claims against the LLP. The members will be personally liable for any negligence claims that cannot be satisfied out of the partnership assets or relvant insurances.
In fact an LLP is wound up in the same way as a company and the partners do share the same risks as directors of insolvent companies in the event that they have not conducted themselves properly in the period leading up to failure.