How and when can a liquidator sell partnership assets held by an insolvent manager of a corporate partnership to satisfy a claim by a creditor? Here, lawyer Sarah Sherman discusses a recent Federal Court decision providing guidance on this issue.

Key points

• Where the manager of a corporate partnership incurs liabilities on behalf of the partnership, the court will consider whether it has done so in its capacity as agent or trustee.
• If the manager is found to have acted as an agent, it will have a right of indemnity for those liabilities and will therefore have a lien over the partnership assets in the event of insolvency.  The court is likely to allow the partnership assets to be sold by a liquidator to discharge those liabilities.

Background

Petromech Pty Ltd was the manager of a corporate partnership between Gawn Enterprises Pty Ltd and Robert Linton Gawn until its winding up.

At the date of the liquidator’s appointment, Petromech owned three major assets.  The liquidator sold two and held the proceeds of sale along with Petromech’s bank accounts.

The liquidator applied for directions under the Corporations Act to allow him to deal with the partnership assets in satisfaction of the liabilities incurred by Petromech as manager of the partnership, as well as the liquidator’s remuneration and costs.

Decision

The Court found Petromech had conducted the partnership business as an agent because:

• Petromech held the partnership’s assets, including bank accounts, in its own name, and had traded on behalf of the partnership.
• The partnership was created through the dissolution of a previous partnership, where Petromech had also acted as manager.  Through this, the parties had Petromech’s authority to act as agent.

The Court said Petromech had a right of indemnity from the partnership for the liabilities incurred in performing the role of manager, and therefore had a lien over the partnership assets as security for that right.  

Finally, the Court noted well established principles of insolvency that a liquidator of an insolvent corporate trustee (and in this case, an insolvent partnership manager) cannot sell the trust’s property without order of the court.  Ultimately, the Court granted the orders allowing the liquidator to dispose of the partnership assets in satisfaction of any creditor’s claims.

Guidance

This case provides some guidance as to when the manager of a corporate partnership will be found to have acted as an agent.  This is likely to have an impact on how liquidators may deal with partnership assets in the event the manager becomes insolvent.

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