Legal News & Analysis – Asia Pacific – Hong Kong – Corporate/M&A 

This Practice Note by Paul Kwan, Partner at Deacons, explains what ‘dissolution’ means in relation to a general partnership. It specifically discusses two categories of dissolutions: technical dissolutions and general dissolutions.

A partnership formed under the Partnership Ordinance (Cap 38) (PO) can be brought to an end by its:

• dissolution or
• insolvency

 
This Practice Note explains what ‘dissolution’ means in relation to a partnership.

 
What Is Dissolution?

 
There is no statutory definition of dissolution in relation to a partnership but it is the term used to refer to the end of a partnership.

 
However, even if the dissolution of a partnership takes place (PO, s 40):

• the partners in that partnership (or some of them) may continue to work together in a new partnership that takes over the business of the dissolved partnership or
• the authority of each partner to bind the partnership, and the other rights and obligations of the partners, may continue as far as may be necessary to wind up the affairs of the dissolved partnership

 
However the consequences of the dissolution of a partnership depend on what category of dissolution has occurred in relation to it.

 
There are two distinct categories of dissolution (Summers v Smith [2002] All ER (D) 428 (Mar) at para [65]; The Hong Kong Encyclopaedia of Forms and Precedents 2(2), Business Organisations: Partnership Para-graph 30.1 [175]):

• technical dissolution (sometimes called partial dissolution) and
• general dissolution

 
Both of these categories of dissolution occur when a partnership is solvent.

 
Technical Dissolution

 
When the composition of a partnership changes, eg a partner dies or retires from a partnership or a new partner is admitted to a partnership, the partnership in existence immediately before the change is dissolved (Hadlee v Commissioner of Inland Revenue [1989] 2 NZLR 447 at 455).

 
It is usual for a new partnership, taking into account the change in composition, to succeed the dissolved partnership immediately and for the new partnership to take on the assets and liabilities of the dissolved partnership and to continue its business. In such a case there is said to have been a ‘technical dissolution’ of the dissolved partnership because it is not necessary to wind up its affairs.

 
As there is no need for the affairs of the dissolved partnership to be wound up on a technical dissolution, it appears that certain statutory provisions that apply following a general dissolution, eg the continuing authori-ty on each partner to bind a dissolved partnership as far as may be necessary to wind up the affairs of the partnership, will not apply following a technical dissolution (HLB Kidsons (formerly Kidsons Impey) v Lloyd’s Underwriters Subscribing Policy No. 621/PK1D00101 [2008] All ER (D) 137 (Dec) at 16; PO, s 40).

 
In the case of a technical dissolution, it may not be clear to the outside world that one partnership has been dissolved and a new partnership has been created.

Where a technical dissolution occurs as a result of a partner leaving a partnership, the terms on which such partner will be repaid his or her capital and receive any other payments in respect of his or her interest in the partnership (including rights to profits in respect of the period up to the retirement date) will usually be set out in the partnership agreement. Where a technical dissolution is brought about by a partner being admitted to a partnership, the terms on which the new partner is required to contribute to capital and entitled to participate in profits (including the benefit of any profits earned prior to his or her admission) will be agreed at the time of his or her admission (and, in the absence of any specific agreement, the default provisions of PO will apply). An incoming partner will not become liable to creditors of a partnership for anything done before becoming a partner (PO, s 19).

 
A technical dissolution is usually the result of an agreement between the partners in the dissolved partner-ship. If a partnership is governed by a written partnership agreement, it will normally provide that on a change in that partnership’s composition, a new partnership taking into account that change will succeed the dissolved partnership immediately and take on the assets and liabilities of the dissolved partnership and con-tinue its business. If the partners in a partnership intend that a technical dissolution of the partnership should occur on a change in its composition, they should agree to this clearly. If there is no clear agreement be-tween the partners as to what should happen on a change in the composition of the partnership, this will cause uncertainty when it actually occurs. If the partners cannot reach an agreement on how to proceed in those circumstances, it may be necessary for the court to intervene, for instance an outgoing partner may seek a declaration that the general partnership has been dissolved and bring a claim for an account (to de-termine any amounts that may be owing to him or her).

 
There may be rare circumstances where without such an agreement having been made, a new partnership continues the business of a partnership that has been dissolved by a change in its composition (eg if an event makes it unlawful for a partner to carry on as a partner in the business of a particular partnership, that partnership is dissolved by operation of law and a new partnership may be created between the other part-ners who continue to carry on the business of the partnership unaware of the dissolution) (PO, s 36; Hudgell Yeates v Watson [1978] 2 All ER 363; The Hong Kong Encyclopaedia of Forms and Precedents 2(2), Busi-ness Organisations: Partnership Paragraph 31.5 [180]).

 
If there is a technical dissolution, the terms applicable to the new partnership will be the default provisions applied by statute to partnerships, unless contrary agreement is reached between the partners (Firth v Amslake (1964) 108 Sol Jo 198; Hensman v Traill (1980) 124 Sol Jo 776).

 
If a partnership is dissolved by a change in its composition and the change in composition means that it only has one remaining partner, eg, where two people are in a partnership together and one of them retires with-out a new partner being admitted, a technical dissolution cannot take place because the one remaining part-ner cannot constitute a new partnership alone. However the remaining partner may be able to acquire the business of the dissolved partnership in order to carry it on either as a sole trader or through a new corporate vehicle. The court may be involved where there is no partnership agreement providing for what should hap-pen on retirement and the parties cannot agree on the terms with one another. In such a case, the court may order a sale of the partnership’s assets at an open market valuation to the one remaining partner (rather than to a third party), if that would reflect the implied intention of the partners as to what should occur on the re-tirement of one of the partners (PO, s 3(1)).

 
General Dissolution

 
When a general partnership is dissolved and its dissolution is to be followed by the winding-up of its affairs, there is said to have been a ‘general dissolution’ of the general partnership.

 
Following the general dissolution of a partnership, certain statutory provisions apply, eg the authority of each partner to bind that partnership continues, as do the other rights and obligations of the partners, as far as may be necessary to wind up the affairs of the partnership and to complete transactions of the partnership that had been started but had not finished at the time of its dissolution (PO, s 40).

This article was supplied by Lexis Practical Guidance.