Dissolution of a Partnership (part B)
by
Charles Lamson
Dissolution by Operation of Law
Under certain well-defined circumstances, a partnership will be dissolved by operation of the law, that is to say, it will be dissolved immediately upon the happening of the specified event. No decree of the court is necessary to dissolve the partnership.
The most common examples include:
Death
The death of one member of a partnership automatically dissolves the partnership unless the agreement provides it shall not be dissolved. A representative of the deceased may act to protect the interest of the heirs but cannot act as a partner. This is true even when the partnership agreement provides that the partnership is not to be dissolved by the death of a member. The representative receives the deceased partner's share of the partnership's profits.
The partnership agreement can provide for an orderly process of dissolution upon the death of a member. Thus, a provision that the surviving parties shall have 12 months in which to liquidate the firm and pay the deceased partner's share to the heirs is binding.
Bankruptcy
Persons who have their debts discharged in bankruptcy no longer have a responsibility for paying most of their debts, including those connected with the partnership. This destroys the unlimited liability of the partner that could otherwise exist, and the partner is not a good credit risk. Because of this, the law regards bankruptcy of a partner as automatically terminating the partnership. The trustee in bankruptcy has the right to assume control of the debtors partners share of the partnership business, but the trustee does not become a partner. The trustee merely stands in the place of the partner to see that the creditors' interests are protected.
The bankruptcy of the partnership also terminates the partnership. The partnership cannot continue doing business when in the course of the bankruptcy proceeding all of its assets have been distributed to pay its creditors.
Illegality
Some types of businesses are legal when undertaken, but because of a change in the law, they later become illegal. If a partnership is formed to conduct a lawful business and later this type of business becomes illegal, the partnership is automatically dissolved. A law restricting operating an insurance underwriting business to corporations dissolves a partnership formed for this purpose.
Effects of Dissolution
Historically dissolution terminated the right of the partnership to exist unless there was an agreement to the contrary and had to be followed by the winding up of the business. Existing contracts could be performed. New contracts could not be made, except for minor contracts that were reasonably necessary for completion of existing contracts in a commercially reasonable manner. If part of the assets of the firm were goods in process, and additional raw materials had to be purchased before the goods in process could be converted into finished goods, these raw materials could be purchased.
The revised Uniform Partnership Act mitigated these rules so that unless otherwise provided in the partnership agreement, a partnership may be continued when a partner departs if the remaining partners decide to buy out the departing partner's share. The power to buy out a departing partner does not even have to be expressly included in the partnership agreement. The remaining partners simply have to choose to buy out the departing partner.
After dissolution, a third person making a contract with the partnership stands in much the same position as a person dealing with an agent whose authority has been revoked by the principal. If the transaction relates to winding up the business, the transaction is authorized and binds the partnership and all partners just as though there had not been a dissolution. If the contract constitutes new business, it is not authorized, and the liability of the partnership and of the individual partner so acting depends upon whether a notice of dissolution has been properly given. Dissolution does not relieve the partners of their duties to each other. These duties remain until they wind up the business.
Notice of Dissolution
When a partnership is dissolved creditors and other third parties who have done business with the old firm may not know the change. For the protection of these third parties, the law requires that when dissolution is caused by an act of the parties third persons who have done business with the firm must be given notice of the dissolution. If notice is not given, every member of the old firm may be held liable for the acts of the former partners that are committed within the scope of the business.
A partnership usually gives notice to customers and creditors by mail. It is sufficient to give the general public notice by publication, such as in a newspaper. When a new partnership or corporation has been organized to continue the business after dissolution and termination of the original partnership, the notice of dissolution will also set forth this information as a matter of advertising. If the names of the dissolved partnership included the name of a withdrawing partner, this name should be removed from the firm name on all stationary so that the firm will no longer be liable for the contracts or torts of that person.
Notice of dissolution is usually not deemed necessary:
Distribution of Assets
After the dissolution of a partnership, the partners share in the assets remaining after payment of the debts to creditors. The distribution of the remaining assets among the partners is usually made in the following order one:
When a firm sustains a loss, the partners will share the loss equally, unless the partnership agreement provides the contrary,.
*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS. 402-405, 408*j
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