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01 Apr 2007

Legislation Highlighted - Section 141 Joint and Separate Dividends


2 min

Joint and separate dividends

In some bankruptcies, the number of estates is more than the sum of the parts. This happens when two or more bankrupts also create another notional joint estate because they have joint assets and liabilities. Joint estates are commonly formed when business partners or spouses become bankrupt. The joint assets and liabilities form the joint estate and the bankrupts' separate assets and liabilities form separate estates. In this case there will be as many separate estates as bankrupt partners.

The Act provides for assets and liabilities to be distinguished between joint and separate and, through section 110, how surpluses from each estate should be treated. This is designed to stop estates from becoming improperly mixed and protecting the rights of the creditors in each estate. But the position becomes even more complicated in partnerships.

There is a distinction in partnership law between the property of the partnership ("joint" property) and the property of individual partners ("separate" property). There is a similar distinction between creditors of the partnership ("joint" creditors) and the creditors of individual partners ("separate" creditors).

But what happens when only some partners are made bankrupt? Each bankrupt will have a separate estate. In theory there is a joint estate with the non-bankrupt partners. In this case the non-bankrupt partners will wind down the partnership business and distribute the share of net assets to the trustee. Of course there may not be sufficient partnership assets to meet partnership debts. Partnership creditors will then look to the bankrupt estate. But section 141 reads:

Where one partner of a firm becomes bankrupt, a creditor to whom the bankrupt is indebted jointly with the other partners of the firm or any of them shall not receive a dividend out of the separate property of the bankrupt until all the separate creditors have received the full amount of their respective debts.

Section 141 deals with bankrupt partners of a firm where not all of the partners are bankrupt, and states that partnership creditors shall not receive a dividend out of the separate estate until separate creditors have been paid in full. It protects the separate creditors from what could be a flood of partnership creditors that should be paid by the other non-bankrupt partners or out of partnership assets.

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