Laura Borland, senior solicitor at Brodies LLP, explains the difference between partnership insolvency north and south of the border.

Partnership insolvency is treated very differently in Scotland and England and Wales. This article sets out some of the main differences to be aware of.

Separate legal personality

A partnership in England and Wales has no separate legal personality from its partners, and cannot own or grant security over assets. In contrast, in Scotland, a partnership is a legal person distinct from its partners, in terms of s.4(2) of the Partnership Act 1890.

Corporate vs personal insolvency regime

The Insolvent Partnerships Order 1994, as amended, allows partnerships and limited partnerships in England and Wales to be treated as legal entities for insolvency purposes. The 1994 order extends winding up corporate insolvency procedures to partnerships.

A partnership can:

• be wound up as an unregistered company, with or without action also being taken against the individual partners
• be placed into administration, either by the court or by out of court appointment
• enter into a partnership voluntary arrangement
• bankruptcy orders can be made against the members of the partnership

In Scotland, partnerships and limited partnerships (within the meaning of the Limited Partnership Act 1907) come under the personal insolvency regime. A partnership or limited partnership (including a dissolved entity) can therefore be made bankrupt (sequestration in Scotland). It is also possible for a partnership or limited partnership to grant a trust deed (similar to an IVA).

Limited liability partnerships (LLPs) are treated under the corporate insolvency regime in both jurisdictions.

Sequestration/bankruptcy of a partnership

It is possible to sequestrate a Scottish partnership, either on its own, or together with its individual partners. As the partnership and its partners are separate legal persons, it is necessary for separate awards of sequestration to be granted for each.

A Scottish partnership, including a dissolved partnership, can be sequestrated on the petition of a creditor, in terms of the Bankruptcy (Scotland) Act 1985.

A Scottish partnership can also apply for its own sequestration to the Accountant in Bankruptcy (AiB). The AiB is a public official who has a supervisory role in relation to personal insolvencies, and can take appointment as trustee. Independent insolvency practitioners can also take appointment as trustee.

Apparent insolvency

Where a creditor wishes to sequestrate a Scottish partnership, it is necessary to establish that the partnership is ‘apparently insolvent’, as defined by the Bankruptcy (Scotland) Act 1985. Apparent insolvency can be constituted in a number of ways, including:

• the partnership giving written notice to creditors that it has ceased to pay its debts in the ordinary course of business
• a charge for payment of a debt due under a court decree expiring without payment
• a statutory demand for payment served by a creditor expiring without payment or denial by the debtor that the debt is due
• where any of the partners is made apparently insolvent for a debt of the partnership

Where a partnership applies for its own sequestration, it is necessary to either establish apparent insolvency or obtain the concurrence of a qualified creditor.

Business debt arrangement scheme (business DAS)

In Scotland, it’s possible for individuals to apply for a debt payment programme (DPP) to repay their creditors over a period of time, under a statutory debt arrangement scheme (DAS). Provided the DPP payments and continuing liabilities are met, relief from interest and charges is obtained.

Following recent changes to the DAS regime, partnerships and limited partnerships can now apply for business DAS. All debts must be included within the DPP, which must be completed within a 5-year period. All partnership assets must be declared, and the partnership may not sell any ‘non-trading assets’ during the DPP period, except for the benefit of creditors.

To qualify for business DAS, a qualified money advisor (who must be an insolvency practitioner) must provide a declaration of viability, confirming that the DPP has a reasonable prospect of completion. A declaration of viability must also be provided every 12 months.

At present, there has been limited uptake of business DAS and it remains to be seen how widely it will be used in practice.

Given the substantial difference in the treatment of partnerships north and south of the border, practitioners should treat partnerships with care and seek appropriate advice.

About the author

Laura Borland is a senior solicitor in the corporate restructuring and insolvency team at Brodies LLP. Follow @BrodiesLLP or visit Brodies' website.