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.  Businesses in this situation have several options but are often attracted by what they perceive to be the quick fix of insolvency and bankruptcy proceedings, but as JPP Law explains, this option is not available to everyone and may not always be appropriate.

"The costs of winding up a partnership or petitioning partners' bankruptcies are high and can mean that the payout for unsecured creditors is 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", says Mark Glenister.

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.

Options

If the debt is not disputed and the partnership owes you at least £750 you could bring the partnership to an end (wind it up) while not taking any action against the partners personally.  If the amount owed is at least £5,000 you could wind up the partnership and apply to make one or more of the partners personally bankrupt.  You could also, if you are owed £5,000 or more, just apply to make some of the partners bankrupt but leave the partnership alone.

If one of the partners is a company, you can apply for it to be wound up as well as the partnership.

If the debt is disputed then you will need to resolve the dispute first before taking action to recover the amount owed.  You could do this through negotiation with the help of your solicitor or through some other form of alternative dispute resolution procedure, such as mediation or arbitration.  You could also, as a last resort, ask a court to determine the dispute for you and decide how and when the debt should be settled.

Winding up the partnership

To wind up the partnership you must prove that:

• you are owed £750 or more; and
• the partnership cannot pay you that sum.

The partnership will be assessed as being unable to pay if:

• a formal demand for the money (a statutory demand) has been served and remains unpaid;
• an action or proceedings have been started for the 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;
• attempts to enforce a judgment for the debt have been unsuccessful in recovering the amount due;
• a court is satisfied that the partnership's liabilities outweigh its assets.

The advantage of applying to wind up the partnership, but not pursuing the individual partners at the same time, is that this leaves the partners free to trade in other businesses in order to generate profits that can be used in settlement of the debt. The disadvantage is that 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.

Pursuing individual partners via a bankruptcy petition

To make an individual partner bankrupt you must prove that:

• the partnership owes £5,000 or more;
• a statutory demand has been served on both the partnership and the individual partners; and
• the payment has not been forthcoming within three weeks.

 The advantage with this option is that the partner you target may have enough personal money to be able to settle the debt, even if the partnership does not.  It also means that the partnership should be able to continue trading provided there are enough assets within the business to meet the rest of its debts and other obligations.

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.

Issuing court proceedings

If attempts to resolve any dispute over the debt outside of court have failed, you may have no choice but to issue court proceedings.  The advantage of doing this is that, if you are successful, you will have a legally enforceable judgment which you can use to try to obtain payment in a number of different ways.  For example, depending on the amount you are owed, you may be able to apply for a charge to be put on one of the partner's homes (akin to a mortgage) and to force a sale of the property if the debt owed to you remains unpaid.  The disadvantage with court proceedings is that, if they are not managed properly, costs can escalate and become disproportionate to the debt you are trying to recover.

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 a confidential discussion about debts or bankruptcy, or any other corporate or commercial needs, please contact Mark Glenister on (0)20 3468 3064 or by email to info@jpplaw.co.uk