Scottish Law Commission (Reports)

 


APPENDIX D^[1]

EXTRACTS FROM CONSULTATION PAPER ON REFORM OF THE INSOLVENT PARTNERSHIPS ORDER 1994 (ENGLAND AND WALES)

The Background

(1) Prior to 1986, insolvent partnerships were generally dealt with under the Bankruptcy Act 1914, although it was possible to wind up a firm with eight or more partners as an unregistered company. That dichotomy is preserved in the present statutory regime.

(2) Insolvent partnerships are presently dealt with under a hybrid of primary and secondary legislation. Other secondary legislation (such as the Insolvency Regulations 1994) is applied with "necessary modifications" which are not specified.

(3) The Insolvent Partnerships Order 1994 ("IPO") offers a number of routes to an insolvent winding up of a partnership, applying the Insolvency Act 1986 ("the Act") with specific modifications set out in the schedules to that Statutory Instrument. It also introduced aspects of the "rescue culture" to partnerships, creating the possibility of a Partnership Voluntary Arrangement ("PVA") and Partnership Administration Order ("PAO").

(4) The partnership regime follows the corporate insolvency regime, so that at present a proposal for a PVA does not give rise to a moratorium, reducing its efficacy unless coupled with a petition for a PAO. Under the Insolvency Act 2000, a Company Voluntary Arrangement ("CVA") proposal would trigger a moratorium, and it is anticipated that if/when those sections of the 2000 Act are brought into force, there will also be secondary legislation to apply the like provisions to insolvent partnerships. In many cases, partners are advised to apply for "interlocking" Individual Voluntary Arrangements ("IVA") (which do give rise to moratoria^[2]). This is not practical in the case of larger partnerships.

(5) The IPO also implemented a recommendation of the Cork Report in 1986 reversing the common law rule that postponed joint estate creditors behind the creditors of the individual separate estates of the partners. Where there are joint petitions against the firm and members, priorities of debts and expenses are now contained in modified sections 175 and 328 of the 1986 Act.^[3] In general:

(a) the expenses of the joint estate are met from the joint estate, and the expenses of each separate estate are met from that separate estate, but if there is a shortfall on the joint estate, it is apportioned and met by the separate estates, and vice versa;

(b) once the expenses have been met, the joint estate debts are met from the joint estate, in the statutory order of priorities;

(c) if there is a shortfall, the liquidator brings that down as a claim against each separate estate, ranking alongside the separate estate creditors;

(d) claims of partners against each other are postponed behind the claims of their creditors, except in the case of fraud or a wholly-independent debt.

(6) Thus, although it remains possible for a creditor to bring proceedings (including insolvency proceedings) against an individual partner for a partnership debt,^[4] in practice the IPO regime appears to anticipate that joint estate claims will be processed through the joint estate. Creditors who have to bring their claim through the separate estate of an insolvent partner will be disadvantaged, because the claim from that estate is postponed behind other creditors. This is frequently the position of landlords who have granted a lease to only four partners^[5] and failed to take separate covenants from the others.

(7) The solvency of a partnership is determined by the balance sheet of the joint estate, and does not take into account the ability of individual solvent partners to meet partnership debts.^[6]

The Principal Criticisms and Proposals for Reform

(8) It should be possible to achieve a moratorium by proposing a PVA.

(9) It should be possible to wind up an insolvent partnership voluntarily. As in the case of a voluntary liquidation of a company, this should be triggered where it is not possible for a statutory declaration of solvency to be made.^[7]

(10) Those entitled to petition for a partnership to be wound up compulsorily should include:

(a) a creditor;

(b) an office-holder of the partnership;

(c) an office-holder of an insolvent member;

(d) a partner in his capacity as a creditor, or by a "just and equitable petition".

(11) The procedure for winding up a partnership compulsorily should be simplified. Every insolvent partnership should be dealt with on a "corporate" model.

(12) Where a partner is bankrupted and the Court is satisfied that the partnership is unable to pay its debts as they fall due, the Court (on a petition, or of its own motion) should be able to make a winding-up order, following which the liquidation should proceed on a corporate model as above.

(13) The IPO regime should be simplified to reflect the above.

(14) It would be preferable if the regime governing insolvent partnerships were the subject of primary legislation.

The Position of Joint Estate Creditors

(15) Although the present regime appears to contemplate that joint estate creditors will prove in the joint estate, and the liquidator of the partnership will bring any shortfall down to rank for proof in the separate estates, creditors at present still have the right to prove either against the insolvent partnership estate or at the level of the individual estates of the partners. This increases complexity and cost.

(16) It would simplify the process if joint estate creditors are required to prove only against the joint estate where the partnership itself is being wound up. The liquidator would then prove for any shortfall against the separate estates, ranking for dividend along with the creditors of those estates if the partner in question is insolvent. Partners would still be fully liable for partnership liabilities, but the mechanism for distribution would be clearer. This would accord with the economic realities. However, it would involve a substantive change to the rights of individual creditors, which might be controversial.

Note 1    See Part III, para 3.56 above.    [Back]

Note 2    NB: when the changes in the Insolvency Act 2000 are brought into effect, it will also be possible to have an IVA without a moratorium.    [Back]

Note 3    See for example Sched 4 IPO.    [Back]

Note 4    Cf Schooler v Commissioners of Customs & Excise [1995] 2 BCLC 610 CA.    [Back]

Note 5    This is the maximum permitted under s 34(2) of the Law of Property Act 1925.    [Back]

Note 6    Re H S Smith and Sons The Times Law Reports 6 January 1999.    [Back]

Note 7    Cf s 89 of the 1986 Act.    [Back]