Coronavirus: death and illness in a Scottish partnership

The Chancellor has recently announced help for the self-employed in the form of a grant worth 80% of trading profits up to a maximum of £2,500 per month for the next three months. For members of a partnership, they can also access this help.

What is a partnership?

A partnership is not a company – it is a matter of fact and circumstance as to whether there is a partnership and the Partnership Act 1890 provides that if there is a “relation which subsists between persons carrying on a business in common with a view of profit”, then there is a partnership. Another important distinction from a company is that all the partners are jointly and severally liable for all the debts and obligations of the partnership.

What happens if a partner becomes ill or dies?

What happens to their share of the partnership business in such circumstances?
Illness is only mentioned once in the Partnership Act 1890 – that partners can apply to the court to have a partnership dissolved when a partner is incapable of performing his duties. Such incapacity has to be permanent and not temporary, and so a (hopefully) short bout of illness will not affect the ill partner’s position as a partner.

On death, though, the default rule under the Partnership Act 1890 is that the partnership is dissolved. Commonly, the remaining partners would carry on business as usual and do so by using the capital or assets of the deceased partner. In such circumstances the remedy for the beneficiaries of the deceased partner would be a settlement of accounting which is only a monetary remedy – importantly, the beneficiaries of the deceased partner have no right to be a partner themselves.

However this default rule is subject to agreement of the partners and therefore it is open to the partners to set out what happens on death in a partnership agreement e.g. it could be that the beneficiaries would become a partner and take on the share of the deceased partner so that no monetary amount is paid out, or the agreement could set out now how the monetary amount is calculated and how it is paid (e.g. in one lump sum or in payments to help the cashflow of the partnership).

Another important factor is if the partnership has heritable property, whether the property should be revalued so that the deceased partner’s beneficiaries would receive a share reflecting the property’s true market value.

Get in touch

Given the current crisis, it may be a good ideal for partners to review the terms of their partnership agreement to see it accurately reflects what they wish to happen on death or, if a partnership agreement is not already in place, whether they need one.

Our team are specialist advisers on all forms of partnership law. If you would like to discuss any aspect of your partnership, please get in touch with a member of our team.