What happens if an LLLP goes bankrupt?

[Bipolarity]

In a LP (limited partnership), at least one partner must be a general partner (having unlimited personal liablity for torts commited by the partnership and for creditor claims against the partnership) and at least one partner must be a limited partner (having liability only to the extent of that partner's contribution to the partnership).

This makes sense, because every company should have at least one person prepared to bear the losses of the firm, however high they may be.

But a new type of business is the LLLP, or limited liability limited partnership, where all partners, including the general partners, have only limited liability.

What happens if this partnership, i.e. the LLLP goes bankrupt and owes huge debts to its creditors? Will the partners be personally liable for creditor claims the partnership? I am curious about this. If not, then what recourse does the creditor have against the partners? What obligations are imposed on the partners as a result of the partnership's bankruptcy?

I apprciate any thoughts on this issue. Thanks in advance!

BiP

 

[phyzguy]

The concept of an entity (a corporation in US terms) having limited liability is not new, but dates back at least to the Limited Liability Act of 1855 in the UK. Most modern corporations function this way. Companies go bankrupt all the time, and the creditors are left to suffer the losses. A creditor knows this going into the business relationship and acts accordingly.

 

[Bipolarity]

I see. What if the bankruptcy is fraudulently induced by the firm's management (i.e. management and shareholders transfer remaining assets to other locations as soon as they know about the insolvency)? Then will creditors have recourse against the company and can the owners be held personally liable? It would be very unfair if creditors were swindled by fraudulent acts committed by management during a bankruptcy.

BiP

 

[phyzguy]

Well, I'm not a lawyer, so I really don't know, but if you can prove fraud, I would suspect you can sue both the company and the managers. The laws depends of course on what country you're in. You might try Google on "bankruptcy fraud" and see what you can learn.

 

[AlephZero]

Under UK bankruptcy law (and I would expect other countries as well), as soon as the insolvency is formally declared, all the assets are controlled by an administrator appointed by the bankruptcy court.

So the situation where partners squirrel away assets "during" or "after" the bankruptcy doesn't arise.

If the partners used the company assets in an illegal fashion (e.g. to pay themselves without making entries in the company accounts) before the bankruptcy was declared, that's just "ordinary" financial fraud.

But since the penalties for being an officer of a company that is declared bankrupt are quite severe (in terms of being banned from holding similar positions in future, etc), deliberate fraud on a scale that lead to bankruptcy would be a fairly dumb thing to do!