Dissolution of partnerships in Singapore
When individuals decide to engage in a business partnership, they usually envision the partnership to work for the long term. Unfortunately, things do not always go as planned and sometimes parties come to the point of choosing to end the partnership.
There are two stages to ending a partnership, namely, dissolution followed by winding up. Preliminarily, a partnership is only terminated after the winding up process. This distinction is significant as partners still owe each other fiduciary duties prior to termination. In other words, partners would still owe each other fiduciary duties after dissolution and during the winding up process. Common fiduciary duties include the duty to disclose all relevant information and accounts between partners, a duty not to misrepresent to other partners, a duty to account to the firm for any secret benefit one obtains from his position in the partnership and a duty to not compete with the partnership.
Dissolution can arise (a) automatically when certain terminating events occur or (b) through an application to court. A partnership may also be dissolved by fraud or misrepresentation.
A. Terminating events
A partnership is automatically dissolved upon the occurrence of one of the following terminating events.
(1) By expiration or notice
Where the duration of the partnership is not a fixed term, it can be dissolved upon a partner giving notice. Partners intending to do so need to verify that there are no other contrary agreements between the parties. There is generally no specific form of notice. If the partnership was originally constituted by deed, a written notice signed by the partner initiating it would suffice. Notice of dissolution may be express or implied through the conduct of the partners. For example, three partners informing another that the business was converted into a limited company, which had already been formed without her knowledge, is tantamount to giving notice.
If a partnership is dissolved by notice, it is dissolved as of the date mentioned in the notice. Where no date is stated, it is dissolved from the date of the communication of the notice.
In contrast, a partnership established for a fixed duration expires at the end of its term, subject to any contrary agreement between the partners. Similarly, a partnership entered into for a specific venture expires at the end of that venture subject to contrary agreements.
(2) By death or bankruptcy of partner
If any partner dies or becomes bankrupt, the partnership is automatically dissolved unless parties agreed otherwise in their contract. For example, the agreement may include a term providing for the continuation of the business even after the death of a partner.
(3) Dissolution by charge
Where a partner allows his partnership interest to be charged for his personal debt, the partnership may be dissolved at the option of the other partners.
A partnership is dissolved by the occurrence of any event which makes it unlawful for the continuation of the business of the firm, or for the members of the firm to engage in a partnership. A partnership to conduct an illegal business would be dissolved from the outset. Notably, the partners cannot enter into an agreement to continue their business notwithstanding its illegality. For example, a partnership is dissolved where one partner fails to obtain the necessary licences from the relevant authorities.
B. Dissolution by court order
One may apply to the court for the dissolution of the partnership in the following circumstances.
(1) Mental or physical incapacity
Mental incapacity in the form of permanent unsoundness of mind can be one reason for the court to dissolve a partnership. However, the court may not exercise its discretion to dissolve the partnership where a partner’s mental incapacity is only partial or temporary.
The court may also order dissolution where a partner has become physically incapacitated and is permanently incapable of performing his obligations under the partnership contract. However, the court will not dissolve the partnership where the incapacitated partner is recovering or showing signs of improvement.
(2) Prejudicial conduct by a partner
Where one partner is guilty of conduct which prejudices the partnership’s business, the court may order a dissolution. An example is when a partner commits a serious breach of trust like embezzlement or if one partner behaves violently towards another.
Criminal conduct which hurts the partnership’s professional standing can also constitute prejudicial conduct. For example, a partner who was convicted of cheating a third party was held to have prejudiced the partnership’s business.
(3) Wilful breach of partnership agreement
The court may dissolve a partnership if a partner wilfully or persistently breaches the partnership agreement. The court will consider the frequency and seriousness of the breach when deciding how to intervene. The court will dissolve the partnership if the breaches cause mistrust between partners and undermine the fiduciary relationship between them, such as if one partner makes many irregular entries into the partnership’s accounts. Another example of a wilful breach is where a partner is excluded from management participation.
(4) Conduct that makes continuation of the business impracticable
The court may order a dissolution when the conduct of a partner makes the continuation of the partnership impractical. This can occur where there is an irreparable breakdown in relations between the partners such that mutual confidence is undermined. However, the court will refrain from intervening in trivial and petty squabbles among partners.
(5) Loss-making business
Where the continuation of the business undertaken by the partnership will result only in a loss, the court may order a dissolution. In such situations, the practical impossibility of generating profits must be proven. It is insufficient that the partnership is merely going through a loss-making period. The court will not grant a dissolution where it can be established that the losses incurred were due to a temporary situation that can be overcome.
(6) Just and equitable grounds
The court may dissolve the partnership where it is just and equitable to do so. Typically, this applies where the relationship between the partners has broken down so irretrievably that it would be pointless to carry on the partnership. One example is when partners have such an acrimonious relationship that they refuse to meet each other which results in a complete management deadlock.
C. Fraud or misrepresentation
As a matter of general contract law, a partnership also can be dissolved where there is fraud or misrepresentation by a partner. The party entitled to rescind the partnership contract is entitled to be indemnified against the party guilty of fraud or misrepresentation against all the debts and liability of the partnership.
II. Winding up
A partnership does not cease to exist immediately upon its dissolution. Winding up commences after dissolution, where all partnership affairs will be settled. This includes the completion of unfinished transactions, payments to creditors, liquidation of assets and the distribution of proceeds to various partners. The partnership is only terminated after all partnership matters have been fully wound up.
Before the partnership is terminated and during the winding up process, each partner still has the authority to bind the partnership. However, this authority is limited only to what is deemed necessary for the winding up process and to complete unfinished transactions. It must be noted that the partner who has become bankrupt has no authority to bind the firm.
Dealing with the possibility of the dissolution of a partnership may be complex, more so if it involves disputing parties. Our experienced lawyers would be able to guide you through the process and find practical recommendations that can solve the situation amicably for all parties involved.
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