Objectives
At the end of this lecture you will be able to:
§ Explain an act of bankruptcy by a partner
§ Explain procedures involved in the treatment of joint and separate
estates
§ Prepare Partnership statement of affairs and deficiency account.
Content
§ An act of bankruptcy by a partner
§ Procedures involved in the treatment of joint and separate estates
§ Preparation of partnership statement of affairs and deficiency
account.
An Act of bankruptcy committed by one partner results into:
(i)
An act of
bankruptcy of the firm
(ii)
An act of
bankruptcy of his co-partner
To sustain a joint adjudication against two or more partners, it
is necessary that some act of bankruptcy shall have been committed by each of
them
A bankruptcy petition may be filed against an individual partner
either by separate creditor in respect of a private debt or by a joint creditor
in respect of a claim against the partnership
A creditor having any claim against a partnership has a right to
present the petition against any one or more (not necessarily all ) of the
partners
On the adjudication of one partner, his trustee becomes entitled
to:
(i)
All his
separate property
(ii)
All his
interest in the joint estate of the partnership
However the trustee does not become a partner. He has no right to
interfere in the management or winding up of the partnership business. An
adjudication order against one or more partner usually operates to dissolve the
partnership
The administration of the affairs of the partnership for the
purpose of ascertaining and paying to the trustee the bankrupt partner’s share
will be carried out by the solvent partner unless all other partners have been
guilty of misconduct or are incapable of acting. The solvent partners may apply
to the court to restrain the trustee from interfering.
A claim against the partnership (a joint creditor) can not be paid
any dividend out of the separate estate of the bankrupt partner, until all
separate creditors have been paid in full
Steps involved for the bankruptcy of a partnership
- Any two or more
persons, being partners, or any person carrying on business under
partnership name may take proceedings or be proceeded against under the
bankruptcy law, in the name of the firm
- A joint petition
against two or more partners must be founded upon either a joint debt or
some act of bankruptcy committee by each of them. A firm commits an act of
bankruptcy by non-compliance with a bankruptcy notice founded on a
judgement against the firm
- Petition for
bankruptcy may be filled by the firm or by any creditor competent to do
so. Where the petition is filled by the firm, it may filled by one or more
partners (not necessarily all). But the names of all partners must be
fully disclosed and the petition must be accompanied by an affidavit that
all partners concur with filling of the petition
- Since limitation
of liability is not one of the benefits enjoyed by partnerships, the
liability of the partnership extends to the whole of the resources of
every one of the several partners
- When the receiving
order is made against the firm, the partners must submit statements of his
separate affairs
- After receiving
order is made against the firm, the joint creditors as well as the
separate creditors of each partner are called collectively for the first
meeting of the creditors. Any compositin of scheme of arrangement in
respect of the joint estate must be considered only by joint creditors ,
and in respect of each separate estate by the appropriate separate
creditors
- Only one trustee
is appointed. The one appointed by the joint estate will administer all
the separate estates as well. Each set of separate estate may however
appoint its own committee appointed in respect of the joint estate will
act in respect of the concerned separate estate as well
- The trustee’s
remuneration in relation to each estate may be fixed by the appropriate
group of creditors or the corresponding committee of inspection
- The costs payable
up to and inclusive of the receiving order are to be apportioned between
the joint estate and several estates in such proportion as the official
receiver in his discretion, may determine
- The property of
the joint estate shall be applied first to payment of joint debts and if
there is a surplus, it shall be dealt with as part of the respective
separate estates in proportion to the rights and interest of each partner
in the joint estate.
- The separate
estate of each partner shall be applied first in payments of his separate
debts. If there is any surplus it shall be dealt as part of the joint
estate. In the event there is any deficiency in that estate, no such
transfer can be made on the ground that there are no creditors of the
separate estate, until the intention to do so has been gazetted
- Where the joint
and separate estates are being administered, the dividends from each estate
shall be declared simultaneously. An expense incurred in this connection
shall be apportioned by the trustee among the joint estate and the
separate estates taking into account the work done for and at the benefit
received by the respective estates
Joint estate and Separate Estates
In view of the requirements that the joint estate shall be applied
first to the joint debts, and the separate estate to the debts, it becomes very
important to
i)
Identify
each estate distinctly and maintain separate accounts
ii)
And for the
trustee to take care not to admit a proof to the wrong estate
To identify what constitutes the joint estate, it has to be
ascertained whether a property in question belongs jointly to all the partners
or to any one or some of them, to the exclusion of others.
It is for the partners to determine among themselves by mutual
agreement, what shall be the property of the firm and what shall be the
property of the individual partners. If there is no agreement, the partnership
law provides that:
(i)
All property
originally brought into partnership stock or are partnership property
(ii)
Unless
contrary intensions appears, property acquired with money belonging to the firm
is deemed to have been acquired on account of the firm
Partnership Statement of Affairs
Since a receiving order made on a partnership is to be regarded as
one made on every one of the several partners as well, the partnership is
required to submit a separate statement of partnership affairs, and each
partner is required to submit his own statement of affairs. These statements
are to be prepared on the same form as used in respect of bankruptcy of
individuals, and are to be accompanied by the prescribed eleven lists,
including the deficiency account. Rules governing the time of submission, the
manner of submission and so on are also identical
Tutorial Note During examination:
During examination, some candidates called upon to prepare
statements of affairs and deficiency accounts of partnership, find it
convenient to combine them in adjacent columns, using a single sheet of paper
for several statements of affairs and another for several deficiency accounts
Preparation of several statements of affairs and the corresponding
deficiency accounts should present no additional problem as long as each pair
is identified separately from the other, except for the following two points:
(a)
In reckoning the personal assets of each partner
on the day of the receiving order, care must be taken to include his
investments in the partnership represented by capital account and current
account balance in the partnership book as well as any other amount due to him
or from him or to the partnership
(b)
In the
event any partner has accepted personal responsibility for any joint creditors,
the joint creditor is able to rank against that partner’s separate estate as
well for the full amount of his claim on the joint estate without even setting
off the value of any security he may have from the joint estate.
Illustrative example:
Bolt and Nut were equal partners in Mwanza Auto Garage holding
equal fixed balance in their capital accounts receiving order was served on the
MAG on 31 March 2013. The net assets of the firm on this date were as follows:
Items
|
Appearing in the books
|
expected to realise
|
Land and buildings
|
140,000
|
150,000
|
Motor Vehicles
|
180,000
|
60,000
|
Furniture and Fittings
|
60,000
|
20,000
|
Stock in Trade
|
96,000
|
65,000
|
Trade Creditors
|
112,000
|
58,000
|
Cash and Bank
|
62,000
|
0
|
Housing bank Loan
|
108,000
|
0
|
Bank overdraft
|
87,200
|
0
|
Creditors
|
198,500
|
0
|
Personal assets and liabilities of the partners apart from their
investment in the partnership were as follows:
Bolts
|
Nuts
|
|
Land and buildings
|
100,000
|
0
|
Motor Vehicles
|
35,000
|
28,000
|
Furniture and Fittings
|
18,000
|
12,600
|
Cash in hand
|
12,000
|
1,500
|
Life policy at surrender value
|
26,000
|
0
|
Income Tax payable
|
10,500
|
6,500
|
Gambling debts
|
0
|
26,500
|
Investments bank loan
|
82,500
|
0
|
Owing to provisions store
|
16,200
|
0
|
Medical bills
|
0
|
6,800
|
The following additional information is also provided: ( see page
244)
This Lecture is still under progress………..