When a limited liability partnership (LLP) faces growing levels of debt with no hope of future repayment, the partners may agree it is time to simply dissolve the partnership.

Unlike partners in general partnerships who are jointly and severally liable for all the debts and obligations of the firm, LLP members enjoy limited liability. The liability of an individual member of an LLP is limited to the sum, if any, which he or she agreed with the other members to be liable for on the winding up of the LLP.

However, the insolvency regime for LLPs is broadly the same as for companies. Members of an insolvent LLP can be liable for fraudulent or wrongful trading in the same way as directors of a company.

Tests for insolvent partnerships

The tests for an insolvent partnership is also similar to the two generally accepted tests for an insolvent company. If a partnership is:

  • Unable to pay its debts as they fall due; or
  • its assets, when realised in cash, would be insufficient to pay off its debts and other liabilities.

The message, therefore, is to request financial information and ask for answers where matters are unclear.

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