7.13 Partnerships & limited companies
Under Scots Law a partnership has a separate legal persona; the assets and liabilities of a partnership being separate from those of the individual partners who agree on their capital contribution to the firm.
To protect creditors of the firm, however, and to ensure there is no limited liability in the case of the partnership, the partners are jointly and severally liable for all debts and obligations of the firm incurred while they were partners. This liability, however, is in relation to creditors. The partners are not liable as principals; they are liable rather as guarantors.
Their liability is therefore a secondary liability, effectively guaranteeing the firm’s obligations to its creditors. (See Bell’s Commentaries II, 507-508).
The trustee on the bankrupt estate of the firm can rank on the partner’s estate for debts due by the partner to the firm on capital account. It is their duty to do so in order to ingather the whole of the firm’s estate for distribution to its creditors. A firm is only a creditor of its partners in respect of a debt due by the partners to the firm, namely any debit on their capital account. Likewise, a firm is only a debtor of its partners in respect of a debt due by the firm to the partners.
While a solvent partner may appear to be able to walk away from the firm’s debts, the duty of the trustee on the estate of the firm is to ingather the estate of the firm.
The whole point of joint and several liabilities of partners are to enable a creditor to pursue any one partner for the whole of the debt due by the firm to them.
In so far as a creditor of a firm is not paid in full out of the bankrupt estate of a firm they are entitled to pursue any one or more partners for the balance of the debt due to them. If a creditor chooses not to do so that is up to them. The trustee’s role is not to step into the shoes of the creditors in this respect, but to ingather and distribute the firm’s estate to its creditors. They only act as a creditor in relation to the partners insofar as there is a balance owing by them on their capital account.
It is on this basis that, once the firm’s assets have been distributed, even though the firm’s creditors have not been paid in full, the trustee on the bankrupt estate of the firm is exonerated, leaving the creditors to seek the unpaid balance of their debts from the separate estate of the partners (Bell’s Commentaries II, 561-562).
There are two situations clearly set out in Goudy and in other authoritative textbooks, e.g. Millar on Partnership. In the first situation, the firm’s trustee may rank on a partner’s separate estate, but only for a debt due by the partner to the firm on their capital account. (See Dunlop v Speir (1756) M. 14610).
This is to be distinguished from a case when the partners have all paid up their capital accounts in full, but the firm’s estate is insufficient to pay its creditors in full. A claim on a partner’s estate in relation to the deficiency of the firm’s funds can be made only by proper creditors of the firm. It cannot be made by a creditor who was also a partner. Nor can it be made by the trustee of the estate of the firm, as the title to sue a partner on their obligation as guarantor of the firm’s debts is in the individual creditors. It is not an incident of the firm’s estate. A partner’s liability to make up any deficiency is based on their liability as guarantor. (See Laing Brothers & Company’s Trustee v Low (1896) 23R.1105).
Estates of an individual debtor may be made bankrupt for partnership debt possibly because the petitioning creditor has dealt solely with that individual and is unaware of the existence of a partnership.
Subsequently, the trustee finds that the bulk of assets revealed to them by the debtor are, in fact, partnership assets which, being assets of a separate legal person, do not vest in the trustee by virtue of their appointment.
No specific duty is imposed upon a trustee when this type of situation comes to their notice. The creditors may indeed mistakenly believe that these assets are protected. It appears to the Accountant that when a trustee becomes aware of such a situation they should send a notice to all creditors advising them:
- that as the trustee on the estate of the individual partner they cannot realise or otherwise deal with the partnership assets
- that they have no title to petition the courts for bankruptcy of the partnership to secure protection for those assets but creditors of the partnership may
- and point out that, unless action is taken by a partnership creditor, those partnership assets are at risk and may disappear
Despite the above, if all the partners of the firm have been made bankrupt and the firm is apparently insolvent, and either the individual partners are creditors of the firm or if the partnership was dissolved by the bankruptcy of one or all of the partners, it would in these circumstances be open to the trustee(s) of the individual partners to petition for the bankruptcy of the partnership, with the concurrence of a qualified creditor.
The trustee can seek to petition for appointment as a liquidator to a company in which the debtor was a majority shareholder. In this case it is quite clear that the debtor’s shares in the company vest in the trustee; accordingly the trustee steps into the shoes of the debtor and has the same right to petition for appointment of a liquidator on the same grounds on which the debtor themselves could have petitioned.
- First published
- Monday, 1 November 2021
- Last updated
- Saturday, 1 October 2022
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