Dissolution of a Partnership
(part A)
by
Charles Lamson
The change in the relation of the partners caused by any partner's ceasing to be associated in the carrying on of the business is called dissolution of a partnership. The withdrawal of one member of a going partnership historically dissolved the partnership relation, and the partnership could not thereafter do any new business. The partnership continued to exist for he limited purpose of winding up or cleaning up its outstanding obligations and business affairs and distributing its remaining assets to creditors and partners. After the partnership completed this process, it was deemed terminated and went out of existence. However, if a partner wrongfully withdrew, the remaining partners could continue the business. The revised Uniform Partnership Act somewhat modified these rules.
 |
Dissolution by Acts of the Parties
Acts of the partners that dissolve a partnership include:
Agreement
At the time they form the partnership agreement, the partners may fix the time when the partnership relation will cease. Unless they renew or amend the agreement, the partnership is dissolved on the agreed date. If no date for the dissolution is fixed at the time the partnership is formed, the partners may by mutual agreement dissolve the partnership at any time. In this case the subsequent decision to dissolve the partnership does not bind the partnership unless all the partners consent to the dissolution.
Sometimes the parties do not fix a date for dissolving the partnership, but the agreement sets forth the purpose of the partnership, such as the construction of a building. In this event the partnership is dissolved as soon as the purpose has been achieved.
Withdrawal or Alienation
The withdrawal of one partner at any time and for any reason unless wrongful historically dissolve the partnership. There is no prescribed form for withdrawal. A partner can withdraw merely by informing the other partners of the withdrawal. In a partnership for a definite term, any partner has the power, but not the right, to at any time. A withdrawing partner has liability for any loss sustained by the other partners because of the withdrawal. If the partnership agreement does not set a dissolution date, a partner may withdraw at will without liability. After creditors are paid, the withdrawing partner is entitled to receive capital, undistributed profits, and repayment of any loans to the partnership.
Similar to withdrawal, the sale of a partner's interest either by a voluntary sale or an involuntary sale to satisfy personal creditors does not of itself dissolve the partnership. But the purchaser does not become a partner by purchase, since the remaining partners cannot be compelled to accept as a partner anyone who might be a persona non grata (an unacceptable or unwelcome person) to them. The buying partner has a right to the capital and profits of the withdrawing partner but not a right to participate in the management.
Expulsion
The partnership agreement may, and should, contain a clause providing for the expulsion of a member, especially if the membership has more than two members. This clause should spell out clearly the acts for which a member may be expelled and the method of settlement for such a partner's interest. A partnership may not expel a partner for self-gain. The partnership agreement should also set forth that the remaining partners agree to continue the business upon expulsion of a partner otherwise, it might be necessary to wind up the partnership business and distribute all the assets to the creditors and partners, thereby terminating the partnership's existence.
Dissolution by Court Decree
Under certain circumstances a court may issue a decree dissolving a partnership. The chief reasons justifying such a decree include:
Insanity of a Partner
A partner may obtain a decree of dissolution when a court declares another partner insane or of unsound mind.
Incapacity of a Partner
If a partner develops an incapacity that makes it impossible for that partner to perform the services to the partnership that the partnership agreement contemplated, a petition may be filed to terminate the partnership on that ground. A member of an accounting firm who goes blind would probably be incapacitated to the extent of justifying the solution. The court, not the partners, must be the judge in each case as to whether or not the partnership should be dissolved. As a rule, the incapacity must be permanent, not temporary, to justify a court decision dissolving the partnership. A temporary inability of one partner to perform duties constitutes one of the risks that the other partners assumed when they formed the partnership.
A question may arise as to whether an illness or other condition causing a partner's inability to perform duties is temporary or not. The safest procedure is for the remaining partners to seek a court order determining the matter.
Misconduct
If one member of a partnership engages in misconduct prejudicial to the successful continuance of the business, the court may, upon proper application, decree a dissolution of the partnership. Such misconduct includes habitual drunkenness, dishonesty, persistent violation of the partnership agreement, irreconcilable discord among the partners as to major matters, and abandonment of the business by a partner.
Futility
All business partnerships are conducted for the purpose of making a profit. If this objective clearly cannot be achieved, the court may decree dissolution. One partner cannot compel the other partner members to assume continued losses after the success of the business becomes highly improbable and further operation appears futile. A temporarily unprofitable operation does not justify a dissolution. A court will make a decree of dissolution only when the objective reasonably appears impossible to attain.
*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS. 399-402*
end
|
No comments:
Post a Comment