A partnership agreement will usually specify when it is to commence, it’s duration and will vary many if not all of these general rules. A common amendment is to state that the partnership will not automatically terminate when a partner leaves, gives notice, dies or becomes bankrupt
Whilst a retiring partner would normally remain liable to the outside world for partnership commitments made before he retires, a partnership agreement may contain an indemnity from the remaining partners covering the retiring partner (other than where the retiring partner is in the wrong).
Death and Bankruptcy
The estate of a partner who dies or becomes bankrupt is not liable for partnership debts incurred after his death or bankruptcy.
Common reasons for expulsion might include: a partner breaching the partnership agreement, ceasing to hold a relevant qualification, neglecting to perform his duties, charging (mortgaging) his share in the partnership or failing to pay any money owed to the partnership.
As one would expect, expulsion for discriminatory reasons such as sex, race or disability is not permitted.
As partners may well contribute different amounts of capital at different times to the partnership, it is common for the partnership agreement to specify each partner’s investment in the partnership which can be adjusted to reflect any additional capital sums invested, capitalised profits or withdrawals.
The partnership agreement should also deal with the repayment of capital (or otherwise) on the death, retirement or expulsion of a partner, together with a mechanism for calculating the value of the relevant partner’s share.
For example, it is not uncommon for partnerships to carry on business from a property owned by one partner, or for other assets owned by one partner to be used by the partnership.
Partnerships are not legal entities so partnership property is usually held on trust for the partnership by all or some of the partners.
Ownership of property or other assets is particularly important in the event that the partnership becomes the insolvent or an individual partner is declared bankrupt. Property owned by the partnership must be used first to meet the partnership’s liabilities; any remaining liabilities of the partnership must be satisfied by the individual partners out of their own assets. In contrast, both partnership and individual creditors rank equally in trying to recover debts in the event that an individual partner is declared bankrupt.
Often an outgoing partner is paid-off in installments to ease the burden on the remaining partners.
Alternatively, the partnership agreement might specify that the accounts of the period in which the partner departs are used and apportioned appropriately and/or that any outgoing partner must retire at the end of an accounting period. This may avoid the expense of preparing separate accounts.
A partnership agreement should contain comprehensive provisions regarding the preparation of accounts when a partner leaves the partnership. Including, whether assets should be re-valued or goodwill included.
Anyone who had dealings with a partnership before the relevant partner left needs to be notified of the departure to avoid the relevant partner being liable for the firm’s post-departure dealings.