What is the process of liquidating a partnership business?

When a partnership business declines and there’s no prospect of rescuing it, the partners can place it into liquidation. Seeking professional guidance as soon as cash flow problems present themselves is important, however, as at that stage there may be other options available.

On entering liquidation, the business’ assets are realised for the benefit of creditors. The partners may also be at risk of personal bankruptcy, so how is a partnership business liquidated and what are the risks for partners?

What is the process for liquidating a partnership business?

The liquidation of a business partnership is similar in nature to that of a limited company. A licensed insolvency practitioner (IP) must administer the procedure, which is called Creditors’ Voluntary Liquidation, or CVL.

The liquidator realises the partnership assets and carries out an investigation into the partners’ actions leading up to insolvency, to establish whether they contributed to the business’ decline.

CVL vs enforced liquidation

Even though it means the end for the partnership business, CVL does offer important benefits to partners. The voluntary nature of the process can reduce the likelihood of misconduct allegations being made against one or all of them.

A creditor must be owed a debt of £750 or more before they can act to wind up the partnership, and the existence of this debt is proven via an unpaid statutory demand. It’s not advisable for partners to deliberately take this route, however, as by waiting for a winding up petition their creditors may suffer further financial loss.

What are the risks of liquidation for the partners of the business?

The risks of joint and several liability

If the liquidation sale brings insufficient funds to repay creditors, the partners become personally liable for the remainder, either jointly or severally. This could lead to personal bankruptcy in addition to the loss of their business.

Disqualification and other sanctions

When a liquidator’s investigation uncovers wrongful or illegal conduct, partners become at risk of disqualification for up to 15 years, in addition to incurring fines, and even imprisonment if fraud is found to have taken place.

Insolvency Service investigations

The Official Receiver is appointed as the initial office-holder in cases of compulsory liquidation, and carries out stringent investigations into the partners’ actions. Their investigation includes lengthy interviews with each partner to determine whether misconduct has taken place.

How might a partnership business avoid liquidation?

If the partners act quickly, they may be able to save their business from liquidation. A potential option is a Partnership Voluntary Arrangement (PVA) whereby debts are restructured within a new, formal instalment plan.

This agreement is legally binding and negotiated by licensed professionals to ensure the business can support the new repayments for its full term. Partnership Voluntary Arrangements are based on the same concept as Company Voluntary Arrangements (CVAs) for insolvent limited companies.

As business partners are jointly and severally liable, a Partnership Voluntary Arrangement may run in conjunction with Individual Voluntary Arrangements (IVAs) entered into by the partners individually, or as an ‘interlocking’ arrangement that mirror each other.

Early professional advice is key

In order to protect the business partners as individuals, as well as the business, professional advice should be sought as soon as possible, and ideally well before the business enters insolvency.

UK Liquidators specialises in partnership business liquidation, and can provide the confidential unbiased advice you need. Please get in touch with our partner-led team to arrange a free, same-day consultation. We operate an extensive network of offices nationwide, so you’re never far away from professional support.