Business partnerships are common in professional services, trades, and small business generally. Unlike companies, partnerships are not separate legal entities — they are relationships between individuals (or other entities) who share the profits and liabilities of a business. When a partnership you have dealt with dissolves, and an invoice remains unpaid, the path to recovery depends on who the partners were and what happened to the partnership assets.
Partners are personally liable
The fundamental rule of partnership law — set out in the Partnership Act in each Australian state and territory — is that each partner is jointly and severally liable for debts incurred by the partnership in the ordinary course of business. This means you can pursue any one partner for the full amount of the debt, and that partner then has rights of contribution against the other partners.
This personal liability is one of the reasons partnerships are now less common than corporate structures for larger businesses — the absence of limited liability is a significant commercial disadvantage. But for a creditor holding an unpaid debt, it means there are multiple individuals who may be personally liable.
Who was a partner at the relevant time
A partner is liable for debts incurred during the time they were a partner. A partner who retired before the debt was incurred is not liable for it (though they may be liable if the creditor was not notified of their retirement). A person who joined the partnership after the debt was incurred is not liable for pre-existing debts.
If the partnership had a registered business name, ASIC's register or the relevant state business names register may show historical registrant information. The credit application or contract documents should ideally identify the partners by name.
The dissolution process
When a partnership dissolves, its assets are applied in a defined order: first to pay the debts and liabilities of the partnership, then to repay partner loans, then to distribute the remaining balance among partners in the ratio of their capital contributions. If you are a creditor of the dissolved partnership, you are entitled to be paid from the partnership assets before partners receive anything.
If the partnership assets have been distributed among the partners without paying partnership debts, you may have a claim against the partners who received those assets — a claim that the distribution was made in breach of the duty owed to creditors.
Practical steps
- Identify all partners who were in the partnership at the time the debt was incurred.
- Issue demand letters to each partner individually, referencing their personal liability under the relevant Partnership Act.
- Check whether the partners are individuals with reachable assets — real property, registered vehicles — or whether they have their own financial difficulties.
- If a winding-up of the partnership's affairs is underway, contact whoever is managing that process to lodge your claim.
Contact Merion if you are pursuing a debt against a dissolved partnership — identifying the correct defendants and structuring the demand appropriately is critical to a successful outcome.