Bankruptcy and Partnership Agreements in Australia: Managing Your Risks

Bankruptcy can pose significant risks for individuals involved in partnership agreements, impacting both the bankrupt partner and the ongoing operations of the partnership.

At the Bankruptcy Advisory Centre, we have over 30 years of experience dealing with bankruptcy and insolvency, so we can help you understand the implications of Bankruptcy and Partnership Agreements so that you can take proactive steps to manage risks. We give you the essential information to protect business interests and mitigate potential losses. Here’s what you need to know:

Impact on the Bankrupt Partner

• Personal Liability: In a partnership, each partner is personally liable for the debts and obligations of the partnership. If one partner declares bankruptcy, their assets may be at risk of being seized to satisfy partnership debts.
• Automatic Dissolution: A partner’s bankruptcy may trigger the partnership’s automatic dissolution, depending on the terms outlined in the partnership agreement or applicable state or territory laws.

Treatment of Partnership Assets

• Trustee’s Rights: The bankruptcy trustee appointed to administer the bankrupt partner’s estate may have rights to the partner’s share of partnership assets, including profits, property, and other interests.
• Liquidation or Asset Sale: The bankruptcy trustee may sometimes seek to liquidate or sell the bankrupt partner’s share of partnership assets to satisfy creditors’ claims and obligations.

Continuation of Partnership Operations

• Partnership Agreement Provisions: Partnership agreements often include provisions addressing the consequences of partner bankruptcy and the continuity of partnership operations. These provisions may outline procedures for the admission of new partners, buyout options, or dissolution arrangements.
• Business Continuity Planning: Partners should engage in business continuity planning to assess the potential impact of partner bankruptcy on partnership operations and develop strategies to mitigate disruptions and preserve business continuity.

Creditors’ Rights and Claims

• Creditor Claims Against Partnership: Creditors may pursue claims against partnership assets to satisfy debts the bankrupt partner owes, subject to the priority rules established under bankruptcy laws.
• Protection of Partnership Assets: Partnerships may take proactive measures to protect partnership assets from creditors’ claims by implementing asset protection strategies, such as insurance coverage, asset segregation, or legal structures.

Legal and Financial Advice

• Consultation with Professionals: Partnerships and individual partners facing the risk of bankruptcy or dealing with a bankrupt partner should seek legal and financial advice from qualified professionals, including lawyers, accountants, and insolvency practitioners.
• Review of Partnership Agreement: Partners should review their partnership agreement to understand the rights, obligations, and procedures outlined in the event of partner bankruptcy. Any necessary amendments or updates should be made to reflect current circumstances and mitigate risks effectively.

Bankruptcy and Partnership Agreements

At the Bankruptcy Advisory Centre, we know the significant implications for partnerships facing financial difficulty, affecting partner liability, partnership assets, and ongoing business operations.

We can help you understand the risks associated with Bankruptcy and Partnership Agreements, review partnership agreements, and implement proactive risk management strategies. Partnerships can better protect their interests and navigate the challenges posed by bankruptcy effectively. Our professional advisors offer guidance for managing risks and preserving the continuity and stability of partnership businesses in the face of financial adversity.