What happens when a partner goes bankrupt

Unless the partners have agreed otherwise, section 33(1) of the Partnership Act 1890 dissolves the whole partnership when any partner is made bankrupt. The bankrupt partner’s share, meaning their entitlement once the firm’s accounts are settled, passes to their trustee in bankruptcy, and the remaining partners must account to the trustee for it. A well drafted partnership agreement avoids the automatic dissolution and sets out how the share is valued and paid.

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What does the 1890 Act say?

Section 33(1) provides that, subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner. The dissolution is not limited to the bankrupt partner leaving: the default is that the firm itself comes to an end and must be wound up, even if the other partners are solvent and want to carry on.

The Insolvency Service’s technical guidance for official receivers (chapter 52, paragraph 52.88) says the date of dissolution is the date the bankruptcy order is made, because under section 278(a) of the Insolvency Act 1986 a bankruptcy commences with the day on which the order is made. Paragraph 52.90 adds that the firm may already have been dissolved earlier, for example by a partner’s notice, and that does not change how the trustee claims the share. This page describes the position in England and Wales; Scotland has its own sequestration rules.

Can the partnership agreement keep the firm going?

Yes. Section 33(1) applies only “subject to any agreement between the partners”. The ACCA’s technical factsheet on partnership law notes that in practice the agreement normally provides for the firm to continue after a partner’s death. The same can be done for bankruptcy: the agreement can provide that a partner who is made bankrupt ceases to be a partner, that the others carry on, and how the outgoing share is valued and over what period it is paid.

There is a limit. Paragraph 52.149 of the official receiver’s guidance says a clause under which a bankrupt partner’s share is forfeited to the other partners may be a fraud on bankruptcy law, and that official receivers should resist reliance on it. An agreement can set a fair valuation method and payment terms, but it should not simply hand the share to the continuing partners for nothing because of the bankruptcy. For the general default rules, see the Partnership Act 1890 default rules.

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What happens to the bankrupt partner’s share?

A bankrupt’s estate vests in the trustee under section 306 of the Insolvency Act 1986, and section 283 defines the estate as all property belonging to the bankrupt at the start of the bankruptcy. A partner’s share in the firm is property, so it passes to the trustee. Partnership property itself does not: section 283(3)(a) excludes property held on trust for others, and paragraph 52.153 explains that partnership property is effectively held for the partnership creditors.

The trustee does not step into the bankrupt’s shoes as a partner. Paragraph 52.89 says the trustee has no authority to deal with the dissolution and that the trustee’s interest is limited to the share after the accounts have been settled. Paragraphs 52.146 and 52.147 say the solvent partners are asked to take the account and then pay the trustee, separating partnership from personal property, paying creditors who are not partners, allowing for each partner’s advances and apportioning profits, losses and cross claims. The order for settling the account is in section 44 of the Act; see settling accounts when a partnership is dissolved. Where the share is small, paragraph 52.148 allows the official receiver to agree an informal sale of it to the other partners by exchange of letters.

Two further sections fix the value and timing. Under section 43, subject to agreement, the amount due to an outgoing partner is a debt accruing at the date of dissolution. Under section 42(1), if the continuing partners carry on the business with the firm’s capital or assets without a final settlement, the outgoing partner’s estate can choose either the share of profits since dissolution that the court finds attributable to the use of its share of the assets, or interest at 5 per cent a year on the amount of the share. Section 42(2) removes that right where an option in the agreement to buy the share has been properly exercised.

Can the bankrupt partner still bind the firm?

No. Section 38 continues each partner’s authority after dissolution so far as needed to wind up the firm’s affairs and complete unfinished transactions, but its proviso says the firm is in no case bound by the acts of a partner who has become bankrupt. Anyone who afterwards represents themselves, or knowingly lets themselves be represented, as a partner of the bankrupt remains liable.

Under section 36(3), the estate of a partner who becomes bankrupt is not liable for partnership debts contracted after the date of the bankruptcy. Debts incurred while they were a partner remain their liability, because section 9 makes every partner liable for the firm’s debts incurred during their time as a partner. Section 36(1) means people who dealt with the firm before the change can treat the old partners as continuing until they have notice, so the continuing partners should tell customers, suppliers and the bank promptly.

Is the position different for a limited partnership or a company partner?

For a limited partnership, section 6(2) of the Limited Partnerships Act 1907 says the partnership is not dissolved by the death or bankruptcy of a limited partner, and paragraph 52.48 of the official receiver’s guidance confirms this. If the sole general partner is made bankrupt, paragraph 52.49 says the partnership will be dissolved because it cannot continue without a general partner. Amendments made by the Economic Crime and Corporate Transparency Act 2023, not yet in force, would extend the protection so that no limited partnership is dissolved under section 33(1) by the bankruptcy of any partner.

A company partner is not made bankrupt; it goes into liquidation. Paragraph 52.91 says the winding up of a corporate partner is unlikely to dissolve the firm automatically, though the liquidator will usually resign the company from it. See can a company be a partner.

What if a creditor only charges the partner’s share?

A partner’s personal creditor who has a judgment cannot take partnership property: section 23(1) says execution issues against partnership property only on a judgment against the firm. Instead, under section 23(2) the court may make a charging order over the partner’s interest in the partnership property and profits and appoint a receiver of their share of profits. The other partners may redeem the charge or buy the interest if a sale is ordered (section 23(3)). Section 33(2) gives the other partners the option to dissolve the partnership if a partner allows their share to be charged in this way. That is optional, not automatic.

Can an undischarged bankrupt be a partner?

Yes. Paragraph 52.64 of the official receiver’s guidance says an undischarged bankrupt may be a partner, subject to the usual restrictions on bankrupts in section 360 of the Insolvency Act 1986, such as the offence of obtaining credit above the prescribed amount without disclosing their status. Existing partners decide whether to admit them: section 24(7) of the 1890 Act requires the consent of all existing partners to introduce a new partner, unless the agreement says otherwise. For the wider effects of bankruptcy, see bankruptcy basics.

How does this work in practice?

Illustration only. Carla, Dev and Eve run a shop in partnership with no written agreement. Dev is made bankrupt on 1 March. The partnership is dissolved on that date. Carla and Eve keep trading from the same shop with the same stock while they negotiate. They take an account of the firm as at 1 March, and the figure due to Dev becomes a debt owed to his trustee from that date. Because they used the firm’s assets in the meantime without a settlement, the trustee can claim either a share of the profits since 1 March attributable to Dev’s share or 5 per cent a year interest on its value. Had they signed an agreement with a continuation clause and a valuation formula, the firm would not have been dissolved and the payment would follow the agreed terms.

What mistakes come up most often?

Having no written agreement, so one partner’s bankruptcy ends the whole firm.
Including a clause that forfeits the bankrupt’s share, which the trustee is likely to challenge.
Letting the bankrupt partner keep signing contracts or dealing with the bank after the order.
Carrying on with the firm’s assets for months without settling, which exposes the continuing partners to a claim for a share of later profits or interest.
Failing to give notice of the change, so suppliers can still treat the bankrupt as a partner.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.