Liquidation of Ordinary Partnership: Legal Processes Regarding Liquidation of Partnership, Partnership Obligations and Rights of Partners in Liquidation of Partnership in the Light of Supreme Court Decisions
Ordinary partnership is a type of partnership that does not have a legal personality and in which more than one person brings together their labor or capital to achieve a certain purpose.
In an Ordinary Partnership, the termination of the partnership and the liquidation process is of great importance as the partners are also responsible for their personal assets. The liquidation of an ordinary partnership is a complex process involving many legal and commercial procedures. When the partnership is dissolved, the partnership relationship technically continues until all financial and legal transactions are completed.
In this article, we will elaborate on the liquidation process of ordinary partnerships, the duties and powers of the liquidator, and the relations between creditors and partners in line with the decisions of the Court of Cassation.
1. Reasons for Termination of Ordinary Partnership and Commencement of the Liquidation Process of Ordinary Partnership
In an ordinary partnership, the parties have responsibilities and claim rights arising from the ordinary partnership against each other, and the violation of the obligations of one of the parties (partners) is one of the reasons that justify the termination of the ordinary partnership in accordance with Article 639/7 of the TCO.
Article 639/7 of the TCO, which regulates the reasons for the termination of the ordinary partnership, states that the partnership will be terminated “ in the presence of justified reasons, always by a court decision upon the request for termination, without any further conditions”.
The right to dissolution for just cause is an absolute shareholder right, and it is impossible to limit or completely eliminate this right by the partnership agreement. Indeed, if certain circumstances arise that do not justify the continuation of the relationship between the partners, it is possible for the partners to request the dissolution of the partnership from the court. Even in fixed-term partnerships, it is possible to file a lawsuit for the dissolution of the contract for just cause before the expiration of the partnership period specified in the contract.
Ordinary partnerships may end for various reasons and the liquidation process begins at this point. The main reasons for liquidation are as follows:
- Termination of the Agreement or Expiration of the Specified Period: The partnership is terminated if the period specified in the partnership agreement expires or the purpose is realized.
- Impossibility of Realization of the Objective: The partnership may be terminated if it is no longer possible to carry out the envisaged work. For example, an ordinary partnership established for a construction project shall terminate upon the completion of the project.
- Disputes between Partners: The partnership may be dissolved as a result of significant disputes between the partners.
- Bankruptcy or Death of One of the Partners: Since each partner has personal liability in an ordinary partnership, the partnership may end in the event of the bankruptcy or death of one of the partners. However, in this case, if the other partners wish to continue, they may continue the partnership activities.
These reasons prepare the ground for the liquidation process of the ordinary partnership. The liquidation process is regulated in accordance with the Turkish Code of Obligations (TCO) and includes procedures for the completion of legal and financial obligations.
2. Legal Framework of the Liquidation Process of an Ordinary Partnership
The liquidation process includes transactions such as the payment of all debts of the ordinary partnership, collection of its receivables and distribution of its assets among the partners. The main stages of this process are as follows:
a) Appointment of the Liquidator
A liquidator must be appointed to carry out the liquidation proceedings. If there is agreement between the partners, the liquidator may be one of the partners or an independent third party. However, if there is a dispute between the partners, the court may be applied for the appointment of a liquidator. The decisions of the Court of Cassation clearly set out the powers and responsibilities of the liquidator in this process. The liquidator is obliged to pay all debts of the partnership, collect its receivables and distribute the remaining assets to the partners. It also terminates the affairs of the partnership and makes the necessary reports.
b) Determination of Debts and Receivables
The first task of the liquidator is to identify the debts and receivables of the partnership. In this process, all assets of the ordinary partnership are evaluated and the balance of assets and liabilities is established. The liquidator creates a plan to pay the debts of the partnership in consultation with the creditors. A complete and accurate determination of debts is critical for the healthy progress of the liquidation process.
c) Payment of Debts and Collection of Receivables
When paying the debts of the partnership, attention should be paid to the order of priority. First, public debts such as government, tax and insurance premiums are paid. Then the debts of private creditors are settled. In the liquidation of ordinary partnerships, since the partners have personal liability, the personal assets of the partners may be used in the process of paying the debts. At this stage, the liquidator is responsible for the correct payment of debts and the collection of receivables in full. According to the decisions of the Court of Cassation, the officer should act actively and show due diligence in the negotiations with the creditors.
d) Distribution of Assets
After the debts are paid, the remaining assets are divided among the partners. Pursuant to Article 641 of the Turkish Code of Obligations, profit and loss sharing is made according to the ratios specified in the partnership agreement. If there is no special provision in the agreement, the partners shall share according to the principle of equal sharing. The liquidator must ensure that this distribution is made fairly and correctly. Assets may need to be liquidated during the distribution, in which case the assets are valued.
3. Responsibilities of the Shareholders in the Liquidation Process
Since ordinary partnerships do not have legal personality, the partners remain liable to third parties during and after the liquidation process. This means that even if the partnership is dissolved, the personal assets of the partners may be called upon unless the debts are fully paid. In particular, obligations such as tax debts, insurance premiums and other public debts remain the responsibility of the partners even after liquidation.
The decisions of the Court of Cassation provide important guidance at this point. The Court of Cassation emphasizes that the personal liability of the partners will continue even after the liquidation and states that the partners should show due diligence during the liquidation process. It is warned that incomplete liquidation procedures may result in unfavorable consequences for the partners.
4. Disputes between Partners after the Liquidation of an Ordinary Partnership
The completion of the liquidation process can often lead to some disputes between the partners. The most common dispute issues are the distribution of assets, the lack of transparency in the liquidation process, or the liquidator exceeding its authority. Such disputes may be brought before the courts and the Court of Cassation has established several case law on the liquidation of ordinary partnerships.
In particular, the decision of the Court of Cassation General Assembly of Civil Chambers dated 2021 emphasized the importance of full compliance with the procedures and principles in the liquidation of ordinary partnerships. If the liquidation procedures are not carried out in a complete manner, the financial and legal liabilities of the partners may continue. Therefore, it is obligatory to fulfill each stage of the liquidation process meticulously and in accordance with the law.
5. Liquidation of Ordinary Partnership in the Light of Supreme Court Decisions
There are decisions of the Third Civil Chamber of the Court of Cassation regarding the liquidation and dissolution of ordinary partnerships. With these decisions, the principles to be followed in the liquidation procedure of ordinary partnerships in addition to the TCO rules are outlined and the issues to be considered are specified.
* Decision of the Third Civil Chamber of the Court of Cassation numbered E.2014/11009 K.2014/15095 and dated 18.11.2014
* The decision of the Third Civil Chamber of the Court of Cassation numbered E.2014/10535 K.2014/15088 and dated 18.11.2014
* The decision of the Third Civil Chamber of the Court of Cassation numbered E.2014/13639 K.2015/1168 and dated 20.01.2015
* The decision of the Third Civil Chamber of the Court of Cassation numbered E.2016/10029 K.2018/1119 and dated 15.02.2018
In the light of the decisions of the Court of Cassation, we would like to briefly review the liquidation of the partnership. As follows
In an ordinary partnership relationship; the lawsuit filed by a partner with a claim for receivables also includes the request for the dissolution and liquidation of the partnership. At this point, the liquidation must be carried out by the court itself.
The ordinary partnership relationship is terminated upon the realization of one of the termination reasons listed in Article 639 of the TCO. In this way, there are two main consequences of the termination of the partnership. The first one is the termination of the duties of the managers and the other one is the liquidation of the partnership.
Liquidation is the termination of the partnership by determining all the assets of the partnership and severing all relations of the partners with each other arising from the partnership and the sharing or sale of the assets.
Pursuant to Article 644 of the TCO, which regulates the liquidation procedure, in the event of the dissolution of the partnership, the liquidation shall be carried out unanimously by all partners, including the non-managing partners. However, if the partnership agreement stipulates that certain transactions are to be carried out by one of the partners on his own behalf and on behalf of the partnership, this partner is obliged to carry out those transactions alone and to account to the others even after the termination of the partnership.
The partners may appoint a liquidator to carry out the liquidation affairs. In case they cannot agree on this matter, each of the partners may request that the liquidator be appointed by the judge.
The fee to be paid to the liquidator shall be determined by the judge, taking into consideration the labor required for the liquidation and the income of the partnership assets, and shall be paid from the partnership assets, or if this is not possible, from the partners jointly and severally, unless there is a provision in the agreement or a unanimous decision of the partners. Disputes that may arise regarding the liquidation procedure or the share to be distributed to each partner as a result of the liquidation shall be resolved by the judge upon the request of the relevant parties.
Pursuant to Article 643 of the same law, titled “Sharing of profits and losses”, if there is any surplus after the debts of the partnership are paid, the advances given by each partner to the partnership, the expenses incurred for the partnership and the participation share that each partner has contributed are returned, this gain shall be shared among the partners. If the assets of the partnership remaining after the debts, expenses and advances have been paid are not sufficient for the return of the contributions of the partners, the loss shall be shared among the partners.
The shareholder who has put in the ownership of something as a contribution share cannot take back the thing as it is as a result of the liquidation to be made upon the termination of the partnership; however, he/she may demand the value of the contribution share he/she has put in. If this value has not been determined, the recovery shall be based on the value of the thing at the time it was put in as a participation share.( Article 642 of the TCO).
Unless otherwise agreed in the contract, the share of each partner in the profit and loss is equal regardless of the value and nature of the participation share. If one of the partners’ share of profit or loss is determined in the contract, this determination also refers to the share in the other. An agreement that a partner will only participate in the profit without participating in the loss is valid only for the partner who has put only his labor as a participation share.
As such, the court should ask the partners to agree on the appointment of a liquidator; if they cannot agree on this matter, the court should ex officio appoint a person who is an expert in the field of activity of the partnership as the liquidator to carry out the liquidation process.
Thereafter, the liquidation proceedings of the ordinary partnership should be carried out by the liquidator in 3 stages in three-month periods (the periods may be extended or shortened depending on the nature of the dispute) to be stipulated by the judge.
In the first stage; all assets of the partnership (together with its assets and liabilities) must be determined as of the date of termination of the partnership, the account showing the partnership account must be requested from the managing and managing partner, if there is a dispute in the account given, evidence must be collected by asking the parties, the asset balance sheet determined by the liquidator must be notified to the parties, their objections in this regard must be met and evaluated according to the evidence to be collected.
In the second stage, the sale and liquidation of the assets of the partnership (by applying the official liquidation procedure regulated under Articles 634 et seq. of the Civil Code by analogy) must be realized, and if these assets are not available, their value must be determined by an expert.
In the third and final stage, firstly, the debts of the partnership must be paid and the advances given by each partner to the partnership and the expenses incurred for the partnership and the participation share of each partner must be returned, and if anything increases after that, this gain or (if the remaining assets of the partnership after the debts, expenses and advances are paid are not sufficient to return the participation shares of the partners) the loss must be determined and the final balance sheet must be prepared to be shared to the partners.
After these stages; according to the final balance sheet of the liquidation process made by the liquidator, the judge (pursuant to Article 297 of the CCP) should determine the rights and obligations of the parties, finalize the liquidation process and make a judgment accordingly.
In the light of all these explanations, since it has been determined that a valid ordinary partnership relationship has been established between the parties, the dispute must be resolved by following the order and method described above and specified in the articles.
6. Points to be Considered in the Petitions in the Cases Requesting Dissolution of Ordinary Partnership
In the lawsuits to be filed for the liquidation of an ordinary partnership, the claims in the petition and the content of the petition are very important. Each request and the reasons for reaching the liquidation stage must be clearly explained. For this reason, it will be healthier to carry out this process with a lawyer. The issues to be considered and requested in the petition are as follows;
(Without forgetting that each concrete dispute should be evaluated in its own way, the elements that should be considered in the petition for the liquidation of the ordinary partnership in general are as follows).
* First of all, the lawsuit must be filed with a request for interim injunction and appointment of a trustee.
* With the request for the dissolution and liquidation of the ordinary partnership, it is necessary to include the requests for the appointment of a trustee to the partnership, the amount to be calculated by applying rediscount interest separately for each year to the dividends from the moment of the establishment of the company, and the liquidation of the dissolved ordinary partnership.
* At the first stage, the petition should include a factual summary of the event subject to the dispute.
* Afterwards, the request for liquidation of the ordinary partnership subject to the dispute should be examined in legal terms. Here, the justified reasons for requesting the liquidation of the ordinary partnership should be explained.
* The issues for which we will request an injunction in the petition should be written clearly and precisely. For this reason, a request should be made to the court for the authorization to obtain information about how the ongoing affairs of the partnership are going, to examine the books and records of the partnership and to take samples from them, to summarize the financial situation of the partnership in order to exercise the right of audit stated in Article 631 of the TCO.
* The books, documents and records of the joint venture held by the defendant should be requested to be kept by the court as a precautionary measure in order to prevent loss of rights until the end of the lawsuit and to prevent the possible future lawsuits from being dragged out.
* Appointment of an auditor trustee for the management of certain affairs and assets of the ordinary partnership enterprise, and if the appointment of a managing trustee is not accepted due to the possibility of destroying the evidence of the ongoing partnership, the appointment of an auditor trustee should be requested.
* After the appointment of the trustee, it should be requested to record the commercial activity of the partnership from the establishment of the partnership until the date of the lawsuit and every month from the date of appointment and to submit a report to the court, to record all of the commercial books and to bring the commercial books to the court file.
* Considering that the partnership is still continuing and will continue during the litigation process, it should be requested that the trustee to be appointed by the trustee or a financial advisor to be appointed separately should be authorized to inspect the workplace and to submit a copy of the books and records to the court.
* Within the scope of the audit authority granted to the court by the auditor on the books and records pursuant to Article 631 of the TCO, the plaintiff should also be granted the authority to obtain information, take samples and summarize.
* It should be requested that the goods belonging to the ordinary partnership should be determined collectively together with the goods on sale and in stock in the enterprise in which the ordinary partnership operates, and calculations should be made regarding the type, type, quality, quantity and market value of the goods found.
* It should be requested that the amount to be calculated by applying rediscount interest separately for each year to the dividends from the establishment of the partnership until the date the lawsuit was filed, and the capital value and dividends contributed to the partnership should be taken from the defendant by applying rediscount interest. While making the calculation, it is necessary to request the determination of the fair value of the products in stock in the enterprise in which the partnership operates and the type, type, quality, quantity and market value of the other tools and equipment in the enterprise as of the date closest to the date of the decision and to be included in the calculation.
7. Conclusion: Things to Consider in the Liquidation Process of Ordinary Partnership
Although liquidation of an ordinary partnership may seem like a mandatory stage for a dissolved partnership, it is a complex process involving many legal and financial details. Without the necessary support, even a single mistake made during the process can jeopardize your rights at the end of the day. Successful execution of this process depends on the liquidator’s careful and competent handling of the proceedings. In addition, it is important for partners to remember that their personal responsibilities continue in this process and to seek legal guidance.
Güneş & Güneş Law Office’s 25 years of experience in litigation between partners, intra-corporate problems and company liquidation cases, and the support provided by Güneş & Güneş Law Office, especially in the resolution of partners and intra-corporate disputes, the ways to be followed in order to obtain your rights in case of termination of partnerships, and the ways to be followed in case you want to terminate the partnership, will enable you to move towards success with confidence.
The liquidation of an ordinary partnership is a complex process that needs to be followed strictly and demands must be clearly emphasized. As Güneş & Güneş Law Office, we play a critical role in ensuring that the company liquidation process is carried out in the healthiest way and that you do not suffer any loss of rights during the partnership and company liquidation litigation process.
In the process carried out for the liquidation of an ordinary partnership, even very small deficiencies and mistakes can lead to major losses of rights. In order not to be on the victimized side at the end of the liquidation, the legal support we provide as Güneş & Güneş Law Office will ensure that you proceed safely in the liquidation process and regain all your rights at the end of the process.
With its 25 years of experience and comprehensive service understanding, our office ensures your success in obtaining your rights at the end of the partnership by handling the liquidation process in partnerships from the very beginning and providing detailed and meticulous legal support until the end of the liquidation.