What happens upon the death of a partner? These are the legalities you need to consider for your business to continue.
What is a partnership?
A partnership is a relationship which exists between two or more persons carrying on business together with a view to make a profit. Partnerships are governed by the Partnership Act 1890 (“the Act”). A partnership is not a separate legal entity and the partners generally have unlimited liability.
If a partnership has no written partnership agreement, then the provisions of the Act shall apply.
Death of a partner
Where there is no partnership agreement, section 33(1) of the Act applies and states that every partnership is dissolved by the death of any partner.
This is likely to have an immediate and disastrous effect on the ability of the business to trade. On a dissolution the partnership is wound up which means that the business should close as soon as practical, with the assets being sold, debts paid and any surplus being distributed in a particular order or priority as set out in the Act. Indeed, under section 38 of the Act the remaining partner(s) authority only extends to carrying the winding up out. So, for example they have no authority to enter into contracts for new business.
Further, under Section 42 of the Act if, following the death of a partner, the partnership continues with the business without a final settlement, their estate is entitled to elect to receive either a share of the profits made post the date of death which arise from the use of the deceased partner’s interest in the business or interest at 5% a year on the value of their share.
However, if there is a partnership agreement in place, then this will most likely contain provisions for the business to continue and for the deceased’s partners share to be valued and paid out over a period of time.
Also, be aware that often such a clause contains a requirement that the deceased’s personal representatives need to be notified in writing within a certain period of time, which could be only days after the death, of a surviving partner’s intention and if that does not occur then a general dissolution may still happen.
Deceased partner’s interest
It is possible to dispose of an interest in a partnership via your will. However, what amounts to a partner’s interest can be difficult to define as it is not a specific asset. The Court of Appeal have ruled that a partnership share can be described as “the share which the partner in question is entitled to receive at the conclusion of the winding up process”. In other words, the interest will consist of that partner’s proportion of the net proceeds of sale of any partnership assets after all debts and liabilities of the partnership have been paid.
Liability beyond death
A deceased partner’s liability for partnership debts continues after death but only in respect of contracts made prior to the partner’s death. There are some exceptions to include personal tax and debts which were incurred as a result of any fraudulent or negligent acts on the part of the deceased partner.
Practicalities
Without a partnership agreement stating otherwise, if a partner dies the partnership will come to an end and must be wound up. This could have terrible consequences for the remaining partners and employees as they are unable to continue the business within the partnership. On dissolution of a partnership, the remaining partners will be required to wind up the business by calling in and valuing all partnership assets, paying off partnership debts and distributing any surplus funds to remaining partners.
Summary
If there is one take away from this article that is to have a well-drawn up Partnership Agreement, which the partners have read and understand the contents of. This will help to ameliorate the potentially awful financial consequences of a partner dying or leaving and will allow the business to continue for future partners and / or generations.
This article was written jointly by Toby Claridge, partner, and Helen Prince, solicitor, in our Commercial Dispute Resolution team.