Parting ways: Issues that arise when winding up companies that are part of a partnership

While liquidators are usually very adept at approaching the winding up of companies pursuant to the Corporations Act 2001 (Qld), complex issues can arise when the companies in liquidation are part of a partnership. These issues can quickly become complicated for liquidators and require legal advice or in some cases review from the courts.

Principles of partnership dissolution are not synonymous with that of companies and in fact may go up against the well-established rules of distributions of the respective companies’ liquidations in accordance with the Corporations Act.

We recently acted for a liquidator appointed in the liquidation of two companies that previously were in a partnership together. A number of complex issues were examined and required detailed advice, including various types of creditor claims made against the companies and partnership, clarification of what assets and liabilities belonged to the partnership as opposed to the individual partners, as well as the appropriate treatment of recoveries made by the liquidator under the Corporations Act.

This article highlights some important take aways for liquidators tasked with dealing with the dissolution of a partnership in conjunction with the winding up of a company who is a partner.

1. Case law and judicial commentary:
   While a relatively niche area of law, there have been a handful of cases that have highlighted the tension between the principles of partnership law and insolvency. The individual facts of each case, particularly the precise terms of any partnership agreement are critical to addressing dispute and identifying the correct approach to dissolution.In the recent case of Woodhouse v Francis [No 2] [2022] WASC 318, Justice Hill provided some helpful guidance as to how to approach the tension between insolvency and partnership principles:

   “The complexity that arises in this case and the other cases that have previously addressed this issue, primarily arises because the liquidator has tried to subject the activities of companies trading as a partnership to insolvency laws which are principally, if not almost entirely, directed to the companies that trade or hold assets in their own right. This complexity can only be resolved if and when the legislature considers that a different result should apply to that which arises on what I consider to be the proper construction of the legislation.

   For the reasons that I have set out above, I consider that the priorities regime under the Act does not apply to the winding up of the Partnership. The winding up of the Partnership is governed by the Deed … “

2. Be aware of partnership principles:
   In Queensland, partnerships are governed by the Partnership Act 1891 (Qld) (‘the Act’) and the terms of any partnership agreement. A couple of key things to keep in mind are as follows:

1. Subject to any agreement between the parties, a partnership dissolves upon the insolvency of any of the partners (section 36).
2. Upon dissolution of the partnership, each partner is entitled to have the property of the partnership applied in payment of the partnership’s debts and liabilities and to have any surplus assets paid to the partners (section 42). This can have important ramifications for liquidators seeking to realise and account for the assets of a company.
3. Subject to any partnership agreement to the contrary, the Act provides rules for the order in which the losses and assets of the partnership are to be dealt with (section 47). These rules do not reflect the statutory requirements contained in the Corporations Act.
4. As against third party creditors, each partner is jointly liable for the debts and obligations incurred while they were a partner (section 12(1)). However, if a partner pays more than their share of the Partnership’s debts, they may be entitled to claim contribution from the other partners. Where a partnership creditor’s claims are not satisfied by the dissolution of the partnership assets, they may then pursue the partners for the payment of these obligations.

Rose Litigation Lawyers regularly provides advice to liquidators in complex and contentious liquidations. If you need advice in relation to a complex liquidation or partnership dispute, you can contact our office for an obligation free consultation.