Liquidation of Partnerships and Unincorporated Joint Ventures regime for priority payments

Introduction

SMEs and mining operations can often be undertaken by partnerships or unincorporated joint ventures. Who is entitled to what priority if such a business fails? 

A survey of the limited case law on this issue was undertaken by Justice Hill in Woodhouse v Francis [No 2] [2022] WASC 318.  Her Honour considered each of the following scenarios:

(a) partnership of more than five partners;

(b) partnerships with five or less than five partners;

(c) unincorporated joint ventures where the joint venturers have appointed a manager to conduct its business. 

Executive Summary

If a partnership is liquidated or otherwise wound up and:

(a) the number of partners is 5 or less, the order of priority for the distribution of its assets is determined by the partnership agreement or the Partnership Act in the relevant jurisdiction; or

(b) the number of partners is more than 5, the order of priority for the distribution of its assets is determined by the priority regime in the Corporations Act 2001 (Cth), including section 561.

If an unincorporated joint venture has appointed a manager to conduct its business and the manager is liquidated, the order of priority for the distribution of the manager's assets is determined the priority regime in the Corporations Act, including section 561.

A Preliminary Point 

Question: Can the question of priorities on the liquidation of either partnerships or unincorporated joint ventures be resolved by reference to the law concerning the administration of insolvent trustees?  

Answer: No. 

Her Honour held that there are significant points of distinction between the liability of a trustee for debts incurred in the course of the administration of a trust, and the liability for debts incurred whilst conducting the business of a partnership.  

Her Honour said (at [97]):

"In the case of a partnership, debts are incurred by partners and the partners are jointly liable for the debts.  It is possible for the partnership and its partners to have separate and different solvency status.  It is also possible for acts to be done in the name of the partnership.  Creditors of the partnership are entitled to payment from the assets of the partnership.  If the partnership assets are insufficient to meet the debts, the partners are jointly liable for payment of those amounts.  If a partner pays more than their share of the joint debt, they are entitled to claim contribution from other partners.  In my view, these distinctions are important and cannot be ignored."

Partnerships of more than 5 partners

Question: Is the priority regime which applies on the liquidation of a company relevant for such a partnership?

Answer: Yes.

As to that circumstance, Her Honour said (at [95]):

"The definition of a 'Part 5.7 body'" in s 9 of the Act applies to a partnership with more than five members (par (c) of the definition).  Where a partnership is a pt 5.7 body, by reason of section 583 of the Act, the partnership can be wound up under ch 5 of the Act, with such adaptions as are necessary to accommodate the fact that the partnership is not a corporation.  In that situation, the Act (including the priority regime under s 561 of the Act) would apply to the winding up of the partnership.  However, in this case, the Partnership only has two members and does not fall within the extended definition in the Act of a pt 5.7 body." 

Partnerships of more than 5 partners where some partners are companies and other partners are natural persons 
Question: May such a partnership be a Part 5.7 body for the purposes of the Corporation Act?

Answer: Yes.

Part 5.7 bodies are defined to include; "(c) a partnership, association or other body (whether a body corporate or not) that consists of more than five members and that is not a registrable body"

There is no reason to confine the term "members" in that definition to corporations. Rather, it may include both corporations and natural persons.  

Partnership of five or fewer members

Question: Is the priority regime which applies on the liquidation of a company relevant for such a partnership?

Answer: No.

Where the partnership has incurred a debt and judgment has been obtained against the partners on account of their joint liability, absent payment by the partnership of the debt, the mode of enforcement:

(a) in the case of a partnership of natural persons, could be by way of a joint petition presented against the partners under the Bankruptcy Act. The order of distribution prescribed by that Act would apply to the partnership's assets and the payment of the claims of the partnership's creditors out of those assets. If any creditor did not receive 100 cents in the $1.00, it could claim for the shortfall against the individual partners; and

(b) in the case of a partnership of either companies or companies and natural persons, it would be by an application for the appointment of a receiver to the assets of the partnership where the receiver will be able to exercise the powers of a liquidator or trustee in bankruptcy. The receiver would collect and realise the partnership's assets and distribute them amongst the partnership's creditors and the order of distribution would be determined by the partnership agreement or the Partnership Act in the relevant jurisdiction. Again, if any creditor did not receive 100 cents in the $1.00, it could claim for the shortfall against the individual partners.

Alternatively to (b), it may be that, where a partnership is comprised entirely of companies, all of those companies are in liquidation, whether having previously been in voluntary administration or otherwise.  As is the case in (b), the partnership's assets would be distributed amongst the partnership's creditors and the order of distribution would be determined by the partnership agreement or the Partnership Act in the relevant jurisdiction.  In the event that any creditor did not receive 100 cents in the $1.00, it could claim for the shortfall against the individual partners.    

The Australian cases decided before Woodhouse v Francis in respect of this question were equally divided. Her Honour concluded (at [93]):

"I considered the conclusion reached by Acting Master Gething in Woods & White v Hopkins [2016] WASC 16 and by Black J in [2018] NSWSC 1885 that the priorities regime in s 556 of the Act does not apply to the winding up of the Partnership, is correct. That is, in my view, the joint assets of the Partnership should be applied first to the payment of the debts of the Partnership.  In applying the joint assets, the order of priority in s 556 of the Act does not apply; the order of priority in the Deed applies.  Where there are insufficient joint assets to meet the joint debts, the debts should be paid pari passu.  Proof of debts can be lodged for any unpaid partnership debts in the liquidation of each partner Company."

Her Honour noted that the decision in O'Keeffe & Heneghan was consistent with the earlier English decision; In re Rudd & Son Ltd [1984] 1 Ch 237.

Unincorporated joint ventures operated by a manager

Question: Is the priority regime which applies in the liquidation of a company applicable to the winding up of such a joint venture? 

Answer: Yes.

Unincorporated joint ventures, in a number of respects, are analogous to partnerships although, typically, joint venturers are not subject to the same obligations amongst themselves as partners.

They are a structure commonly used in the mining industry either for the conduct of exploration activities or for the operation of a mine. 

Most often either one of the joint venturers or a special purpose corporate vehicle will be appointed to manage the business of the joint venture and be entitled to an indemnity for the debts and liabilities incurred in the course of doing so.

That, in a general way, was the circumstance which had to be considered by Robson J in re Victoria Station Corporation Pty Ltd (admins apptd) [2018] VSC 163.  In that case administrators had been appointed to each of the relevant companies in the joint venture and they sought directions as to the way in which the assets of those companies should be distributed in the event of their liquidation. 

It was held that the manager appointed to conduct the business of the joint venture was acting as the agent of the joint venturers.  Accordingly, it was entitled to be indemnified for the debts and liabilities it had incurred in the course of doing so as well as a lien to support that right of indemnification.  In these circumstances, the assets of the manager, in the event of its liquidation, were distributable consistently with the priority regime established by s 561, Corporations Act.  

Authors: Richard Fisher, Consultant; John Nolan, Senior Associate.