WHAT HAPPENS IF A PARTNER BECOMES INSOLVENT? In 2001, three dentists—Ben Rogers,
ID: 2451374 • Letter: W
Question
WHAT HAPPENS IF A PARTNER BECOMES INSOLVENT?
In 2001, three dentists—Ben Rogers, Judy Wilkinson, and Henry Walker—formed a part- nership to open a practice in Toledo, Ohio. The partnership’s primary purpose was to reduce expenses by sharing building and equipment costs, supplies, and the services of a clerical staff. Each contributed $70,000 in cash and, with the help of a bank loan, con- structed a building and acquired furniture, fixtures, and equipment. Because the partners maintained their own separate clients, annual net income has been allocated as follows: Each partner receives the specific amount of revenues that he or she generated during the period less one-third of all expenses. From the beginning, the partners did not antici- pate expansion of the practice; consequently, they could withdraw cash each year up to 90 percent of their share of income for the period.
The partnership had been profitable for a number of years. Over the years, Rogers has used much of his income to speculate in real estate in the Toledo area. By 2013 he was spending less time with the dental practice so that he could concentrate on his in- vestments. Unfortunately, a number of these deals proved to be bad decisions and he incurred significant losses. On November 8, 2013, while Rogers was out of town, his personal creditors filed a $97,000 claim against the partnership assets. Unbeknownst to Wilkinson and Walker, Rogers had become insolvent.
Wilkinson and Walker hurriedly met to discuss the problem because Rogers could not be located. Rogers’s capital account was currently at $105,000, but the partnership had only $27,000 in cash and liquid assets. The partners knew that Rogers’s equipment had been used for a number of years and could be sold for relatively little. In contrast, the building had appreciated in value, and the claim could be satisfied by selling the prop- erty. However, this action would have a tremendously adverse impact on the dental prac- tices of the remaining two partners.
1.What alternatives are available to Wilkinson and Walker, and what are the advantages and disadvantages of each?
2.What Happens if a Partner Becomes Insolvent?
Explanation / Answer
Liability of partners on insolvency
Partners and persons who have management control of partnerships or LLP businesses face the same sanctions as directors of limited companies for specific misconduct, and may be disqualified from office by virtue of the Order.
The court may disqualify a partner from office if that person is or was a partner in an insolvent partnership and his conduct as a partner - either taken alone, or together with his conduct in any other partnerships or as a director of a company - makes him unfit to be involved in the management of another company or partnership. Similarly, a member of an LLP may be disqualified from being a member of an LLP or a director of a company if that LLP has become insolvent and the court considers that the conduct of that member was such as to make that member unfit to be involved in the management of another LLP or company.
Partners and members of LLPs may also, in addition to their personal liabilities, be liable in the same way as directors of limited companies if they are found guilty of wrongful or fraudulent trading and liable top make a contribution to the assets of the partnership.
In the same way as there are restrictions on the reuse of company names, to prevent so-called phoenix company practices, restrictions will also apply on the reuse of LLP names where the original LLP has gone into insolvent liquidation.
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