Dissolving a business partnership: when the partnership dissolves, and what happens to the assets and debts

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This guide deals with a partnership under the Partnerships Ordinance [New Version], 5735-1975: two or more people who carry on a business together with a view to profit, without having incorporated as a company or another corporate body. It explains when such a partnership dissolves, who decides, what happens to the assets and debts, and what to set in advance in the partnership agreement. A limited company is governed by other laws, including the Companies Law, 5759-1999 (חוק החברות, התשנ״ט-1999), and they are not discussed here.

Which partnership does the Partnerships Ordinance apply to?

“Partnership relations” are the relations between persons who carry on a business together with a view to profit, except the relations between members of a corporate body incorporated under any other law (section 1(a) of the Ordinance). So shareholders in a company are not “partners” for the purposes of the Ordinance, even when they call each other that. Alongside the Ordinance, the English rules of equity and common law that apply to partnerships also apply, as far as they do not conflict with an express provision of the Ordinance (section 1(b)).

Whether a partnership was created is assessed under the rules in section 2. Joint ownership of property, even when the owners share the profits from its use, does not by itself create partnership relations (section 2(1)); and receiving a share of the profits of a business is prima facie evidence of a partnership, which can be rebutted in light of all the circumstances of the transaction (section 2(8)).

A partnership formed to carry on a business must be registered within a month of the day it was formed, except a partnership between farmers for a joint venture in cultivating land (section 4). However, failure to register it does not affect the question of whether the partnership exists (section 6).

When does a partnership dissolve without a court?

Subject to the agreement between the partners, a partnership dissolves (section 41(a)):

• A partnership for a fixed term: at the end of the term;
• A partnership for a single venture or a single undertaking: when the venture or the undertaking has ended;
• A partnership for an indefinite term: when one of the partners gives the other partners notice of their intention to dissolve it. The dissolution takes effect on the date stated in the notice, and if no date was stated, on the date the notice was given (section 41(b)).

When no fixed term was agreed, any partner may end the partnership at any time by notice to the other partners; and if the partnership was originally set up by a deed, a written notice signed by the partner giving it is enough (section 36). A partnership for a fixed term that continued to operate after the end of the term without a new express agreement is treated as a partnership at will, and the rights and duties remain as they were on the day the term ended (section 37(a)).

A partnership also dissolves when one of the partners dies or “is declared bankrupt”, subject to the agreement between the partners (section 42). Since the Insolvency and Economic Rehabilitation Law, 5778-2018 (חוק חדלות פירעון ושיקום כלכלי, התשע״ח-2018) came into force (15 September 2019), a provision in an earlier enactment that concerns a bankrupt is read as a provision concerning an individual for whom an order to open proceedings has been given under that Law (section 375(a) of the Law). The partnership also dissolves when an event occurs that makes carrying on its business in effect unlawful (section 44). And the other partners may dissolve it if a partner has allowed their share in the partnership to be charged for their private debt (section 43).

When does the court dissolve a partnership?

At a partner’s request, the court may order the dissolution of the partnership on one of the grounds in section 45: a partner who is permanently of unsound mind; another partner who has become permanently incapable of performing their duties under the partnership agreement; another partner who is guilty of conduct likely to harm the carrying on of the business; another partner who willfully or persistently breaches the partnership agreement, or who behaves in such a way that the other partners have no reasonable practical possibility of continuing with them; when the business can no longer be carried on except at a loss; and whenever circumstances have arisen in which dissolution is, in the court’s opinion, “just and equitable”.

The competent court is the District Court of the district in which the partnership is registered or in which its main place of business is located (section 46). When a partner is entitled to ask for dissolution, or when the partnership has ended, the court may, at a partner’s request and in the absence of another agreement, wind up its affairs, order the payment of its debts and distribute the surplus according to the rights; and if it considers it just and appropriate, appoint a receiver of the partnership’s assets, a manager of its business, or both (section 47).

Can a partner be expelled without dissolving the partnership?

Only if the partnership agreement expressly allows it: no majority of the partners can expel a partner from the partnership, unless a power to do so was given by an express agreement between the partners (section 35). Even without an agreement, the Ordinance sets rules for day-to-day management, subject to any express or implied agreement: disputes on ordinary matters are decided by a majority of the partners, but a change in the nature of the partnership business requires the consent of all the partners (section 34(8)), and so does admitting a new partner (section 34(7)). Every partner may access the partnership books, inspect them and copy from them (section 34(9)).

What happens to the assets and the money on dissolution?

After dissolution, each partner’s power to bind the partnership remains in force only to the extent needed to wind up its affairs and complete transactions that were begun and not finished, subject to any court order (section 49(a)). Every partner is entitled to have the partnership’s assets used first to pay its obligations, and the surplus used to pay what is due to the partners, after deducting from it everything they owe the partnership (section 50).

Subject to the agreement, losses, including deficiencies of capital, are paid first out of profits, then out of capital, and finally, if needed, by each partner individually in proportion to their share of the profits (section 51(1)). The partnership’s assets are applied in this order (section 51(2)):

1. paying the partnership’s debts to persons who are not partners in it;
2. repaying to each partner, proportionally, what is due to them for advances they paid, as distinct from capital they contributed;
3. the costs of winding up the partnership’s affairs;
4. repaying to each partner, proportionally, what is due to them for the capital they contributed;
5. dividing the balance among the partners, in the proportions in which profits are divided.

The partnership has been dissolved: are you still liable for the debts?

Yes. Every partner is liable, jointly with the other partners and severally, for all the obligations of the partnership incurred while they were a partner (section 20(a)). An order in enforcement proceedings (Execution Office) against a partner, based on their several liability for the partnership’s obligations, will be given only if the partnership has been dissolved, or if the creditor obtained a judgment against the partnership and the judgment was not fully complied with (section 20(b)).

A partner who retires does not cease to be liable for obligations incurred before their retirement, except by an express or implied agreement between them, the creditors and the partnership in its new composition (section 27). A person dealing with the partnership after a change in its composition may, as long as they have not learned of the change, treat all the apparent partners of the old partnership as still being partners (section 48(a)), and a notice in Reshumot (the official gazette) of a change in the composition of the partnership serves as notice to everyone (section 48(b)). A change in the registered details is reported to the Registrar within seven days (section 9(a)), and a continuing guarantee for the partnership’s transactions is revoked, in the absence of another agreement, for every transaction after a change in its composition (section 28).

A partner leaves and the others continue: what is the leaving partner owed?

When a partner dies or ceases to be a partner, and the other partners continue the business with the partnership’s capital and assets without a final settlement of accounts, the outgoing partner or their estate may choose, in the absence of another agreement: to receive from the profits made since the dissolution what the court attributes to the use of their share of the partnership assets, or to receive interest on the amount of their share (section 54(a)). If the partnership agreement gives the continuing partners an option to buy their share, and they exercised it properly, the outgoing partner is not entitled to any further share of the profits (section 54(b)). The amount due to the outgoing partner for their share is a debt that arises on the dissolution or on the partner’s death, subject to the agreement (section 55).

Every partner must account to the partnership for any benefit they obtained, without the consent of the other partners, from a transaction concerning the partnership or from using its property, its name or its business connections, and this also applies to transactions made after a dissolution caused by a partner’s death and before the dissolution was completed (section 38). And a partner who, without the consent of the partners, carries on a similar business that competes with the partnership business must account to it for the profits of that business and pay them to it (section 39).

What should you set in advance in the partnership agreement?

Many of the Ordinance’s provisions on dissolution apply “subject to the agreement” or “in the absence of another agreement”. So a written partnership agreement can set in advance what would otherwise be decided by the Ordinance’s default rules:

• Term and exit: for a fixed or an indefinite term, and with what notice a partner leaves (sections 36, 41);
• Death of a partner: whether the partnership continues with the remaining partners (section 42);
• Expelling a partner: only an express power in the agreement allows it (section 35);
• Purchase option: a mechanism by which the continuing partners buy the leaving partner’s share, and how it is valued (sections 54(b), 55);
• Distribution on dissolution: the order of settling accounts in section 51 applies subject to the agreement.

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Frequently asked questions

Can a partnership be dissolved without going to court?

Yes. A partnership for an indefinite term dissolves when one of the partners gives the other partners notice of their intention to dissolve it, and a partnership for a fixed term dissolves at the end of the term, subject to the partnership agreement (section 41 of the Partnerships Ordinance). The court is needed when dissolution is sought on one of the grounds in section 45, or when it is asked to wind up the partnership’s affairs and appoint a receiver or a manager (section 47).

A partner died. Does the partnership dissolve?

Under section 42 of the Partnerships Ordinance, the death of one of the partners dissolves the partnership as regards all the partners, subject to the agreement between them. If the remaining partners continue the business without a final settlement of accounts, the estate may choose, in the absence of another agreement, between a share of the profits attributed to the use of the deceased partner’s share and interest on the amount of that share (section 54(a)).

Is a partner who retired still liable for the partnership’s debts?

For debts incurred before their retirement, yes, unless otherwise agreed between them, the creditors and the partnership in its new composition (section 27 of the Partnerships Ordinance). A person dealing with the partnership who did not know of the change in its composition may treat the apparent partners of the old partnership as still being partners (section 48(a)), and a notice in Reshumot of the change serves as notice to everyone (section 48(b)).

How is the money divided when the partnership dissolves?

Subject to the agreement, the partnership’s assets are applied in this order: paying debts to persons who are not partners; repaying advances paid by the partners; the costs of the dissolution; repaying the capital each partner contributed; and the balance is divided in the proportions in which profits are divided (section 51(2) of the Partnerships Ordinance). Losses are paid first out of profits and then out of capital (section 51(1)).

Does a partnership that was not registered exist?

Yes. A partnership formed to carry on a business must be registered within a month of the day it was formed (section 4 of the Partnerships Ordinance), but failure to register it does not affect the question of whether the partnership exists (section 6).

How do you resolve a dispute between partners without dissolving the partnership?

First of all, according to the partnership agreement. In the absence of another agreement, a dispute on an ordinary matter is decided by a majority of the partners, but a change in the nature of the business and admitting a new partner require the consent of all the partners (section 34(7)–(8) of the Partnerships Ordinance). Every partner may inspect the partnership books and copy from them (section 34(9)), and the partners must give each other true accounts and full information (section 29). You can agree on commercial mediation, and anyone who wants a binding decision outside court can agree on arbitration in a written agreement (section 1 of the Arbitration Law, 5728-1968 (חוק הבוררות, התשכ״ח-1968)). When the dispute leaves no reasonable practical possibility of continuing together, what remains is dissolution by court order on one of the grounds in section 45.