CHAPTER XLVII

TERMINATION OF PARTNERSHIP

§ 301. Termination by Agreement

Upon the expiration of its term as limited by the partnership articles, the partnership will be dissolved in any particular manner prescribed by the articles, or, in the absence of such provisions, in accordance with the rules of law.

A partnership may be dissolved at any time by unanimous agreement regardless of the period fixed by the articles. If any of the partners wish to continue the business, they may buy out partners who wish to retire or who are dissatisfied.

In many cases the most satisfactory method of disposing of a partnership business worth preserving, is by incorporation. This is preeminently a dissolution by agreement. (For methods of incorporation, see Chapter L.)

$302. Enforced Dissolution

A partnership may be terminated by the death or bankruptcy of a partner, or by the sale of his interest. It may also be dissolved because of the impossibility of continuing the business for any reason, or by the bankruptcy of the firm. Mere insolvency may exist for an indefinite period without affecting the partnership relation, but an assignment by the firm for the benefit of creditors, or an adjudication of bankruptcy terminates the partnership.

If a partner sells his interest in the firm to a stranger, it would usually terminate the partnership. Neither the stranger nor the other partner or partners, can be forced to accept

each other as partners and either can take steps to wind up the firm's business.

If a partner wishes to terminate his partnership relations, he may do so at any time simply by giving notice: (1) to the members of his firm, (2) to those dealing with the firm, and (3) to the public generally. If the partnership was for a given term which has not expired, the partner may be liable in damages to his associates for his breach of the partnership contract, but he cannot be compelled to remain.

After giving proper public notice of his withdrawal, the retiring partner is no longer liable for the future transactions and obligations of the firm. He remains liable, however, on the obligations contracted while he was a member of it. The matter of notice is important, as it is the only way in which liability for the future obligations of the firm may be escaped.

Owners of a business concern which had changed from a partnership to a corporation have been held personally liable for the debts of the corporation because they neglected to notify those with whom they were dealing that the business had been incorporated.

When a partner dies or becomes bankrupt, or when war is declared between the countries to which the respective partners belong, the partnership is forthwith terminated, the relation of mutual agency ceases, and neither a partner nor the representative of a partner can bind the partnership or the property or estate of either partner further. Nothing can be done except to liquidate, pay debts, and wind up the partnership affairs.

The insanity of a partner does not work a dissolution, but may be a sufficient reason for asking a dissolution by decree. If the insanity is temporary, the courts will not decree a dissolution.

Where it becomes apparent that only loss can result from the further prosecution of the partnership business, any part

ner, if his associates will not agree to a peaceable termination of the business, can obtain a judicial dissolution.

A breach of the articles of partnership by any of the partners, bad faith, or misconduct so serious as to affect the credit and success of the business or to make it impossible for his associates to work with him, is good ground for dissolution.

In case a person has been induced to enter a partnership by false representations, he can at once dissolve the firm or bring suit to have the whole contract rescinded and cancelled.

In all of these cases, proceedings may be instituted to have the partnership dissolved and to secure an accounting. If necessary, an injunction may usually be had restraining the defendant partners from making new firm obligations, from interfering with or disposing of firm property, or from further conduct of the firm business. The appointment of a receiver is an extreme measure to be resorted to only when the interests of some member of the firm, or of outside creditors are in urgent need of protection. The courts are slow to grant it.

The right to an accounting is a necessary corollary to the right to profits. An accounting is a necessary incident of a dissolution unless the parties have already agreed upon a settlement, which would be a bar to the right. The usual procedure is to appoint a referee, or refer the accounting to a Master in Chancery to examine and report the terms of the partnership, the accounts that have been kept, the capital invested and withdrawn, the profits and the losses, the assets and liabilities, and the proportion in which these should be shared among the partners. The court then makes its orders in accordance with this report, and the receiver, or the partner or partners in charge, will close up the business pursuant to these directions.

Notes:

I.

Where it is necessary actually to wind up the business, any agreement reached between the partners

should provide for a trustee to take charge of the settlement on behalf of the partners. The agreement should direct the closing up of the business, the liquidation of its assets, the collection of outstanding debts, the settlement of its obligations, the partition of losses or the division of profits, and the withdrawal of the investments of the partners.

Under no circumstances have the partners in an ordinary partnership the right to expel an objectionable member. The only way to get rid of such a partner is through a dissolution of the copartnership.

3. The legal enforced dissolution of a partnership is slow and costly and if possible should be avoided.

Almost any agreed dissolution would be better.

$303. Winding Up the Business

Rights and Interests of Partners. Unless otherwise agreed, the amount of each partner's investment is returned to him in full on dissolution of the partnership, if there are sufficient assets. Any remainder, as profits of the business, is then divided in equal proportion among the partners. If losses have been incurred, the losses must first be apportioned equally among the partners, and the amount to be paid each on his investment account must be diminished by this amount.

If one or more partners are bought out, the business passes as a going concern into the hands of the remaining partners. If the partnership is dissolved by proceedings in equity or in bankruptcy, the receiver or trustee takes charge, and the partners turn over the assets to the receiver and have nothing further to do with the business other than to give such information as will aid him in his work.

If the partnership is incorporated, the corporation usually

succeeds to the assets, name, good-will, and location of the firm, and the business is continued as a going concern with the minimum of disturbance.

Duties of Partners on Dissolution. If the business is terminated by agreement, by limitation, or by the death, insanity, or insolvency of a partner, it is usually wound up by the surviving or liquidating partner or partners.

When surviving or liquidating partners take charge, it is their duty to notify people who have dealt with the firm of its dissolution and of the fact that they are engaged in winding up affairs. It is also the duty of these partners to dispose of and fulfil any existing contracts, to dispose of the partnership property to the best advantage, to discharge all debts and obligations, and to turn over to each person entitled thereto his due proportion of the surplus.

Right of Surviving Partner. In the case of the death or resignation of a partner, the surviving partner or partners have a right of possession for the purpose of settling up the affairs of the partnership, but after this is done the right of possession ceases, and each of the partners has the right only to his proportion of the partnership assets when converted into cash.

A surviving partner or partners would have power to sell property of the firm and do all other things necessary to wind up the business.

After the assets of the firm have been turned into cash and the debts have been paid, it is the duty of the surviving or liquidating partners, first, to repay any advances above the stipulated investment of capital to the partners who made them; next, if the funds permit, to return the capital of each partner. Any surplus is then divided among the partners in such proportion as the partnership agreement may provide, or, if there is no provision therefor, in equal proportion.

The surviving partner, if he continues the business, must