What Happens to a Partnership’s Assets and Liabilities upon Dissolution?

A partnership is “the relation that subsists between persons carrying on a business in common with a view of profit” (The Partnership Act (Saskatchewan), RSS 1978, c P-3, section 3(1)). Partnerships can be formed in relation to any trade, occupation, profession or business. However, unlike corporations formed pursuant to The Business Corporations Act (Saskatchewan), RSS 1978, c B-10, a partnership is not a legal entity distinct from the partners of whom it is composed.

Partnerships may be created with little or no formalities. However, once formed, a partnership may be challenging to dissolve. Often, partners have close interconnections in relation to the business ventures being carried on by the partnership.

A partnership agreement can assist the partners in determining their respective roles and obligations. The partnership agreement will often be the guiding document upon dissolution of the partnership. It can address, among other things, the number of partners, the assets of the partnership, and the manner of dissolution of the partnership.

If the parties do not enter into a partnership agreement that addresses the distribution of assets and liabilities at the time of forming their partnership, then The Partnership Act will apply.

Section 46 of The Partnership Act outlines the rules for distribution of assets and liabilities of a partnership upon dissolution that will apply if the division of assets has not been addressed in a partnership agreement. In settling accounts between the partners after a dissolution of partnership the following rules apply:

1. Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly if necessary by the partners individually in the proportion in which they were entitled to share profits;
2. The assets of the firm, including the sums, if any, contributed by the partners to make up losses or deficiencies of capital shall be applied in the following manner and order:
   1. in paying the debts and liabilities of the firm to persons who are not partners therein;
   2. in paying to each partner rateably what is due from the firm to him for advances as distinguished from capital;
   3. in paying to each partner rateably what is due from the firm to him in respect of capital;
   4. the residue, if any, shall be divided among the partners in the proportion in which profits are divisible.

Additionally, where the partnership generates profits after dissolution using partnership assets (prior to a final settlement of accounts between the firm and an outgoing partner), then the outgoing partner may be entitled to share in the profits made since the dissolution of the partnership, or to interest on the amount of their share of the partnership assets (The Partnership Act, section 44).

Only partnership assets are to be divided among partners upon dissolution. If assets were used by the partnership, but did not form part of the partnership assets, then those assets will not be divided upon dissolution (see, for example, Hansen v Hansen, 2005 SKQB 436).

If partners want a distribution of losses or assets other than as set out in The Partnership Act, they should enter into a detailed written partnership agreement which provides for alternate terms of distribution upon dissolution.