In short
How do you dissolve a business partnership?
Under the partnership agreement if it has an exit mechanism, or through a dissolution agreement covering assets, debts, clients and goodwill. Without agreement, the court can be asked to dissolve the partnership under the Partnerships Ordinance.
Partnership or Company: What Exactly Is Being Dissolved
Before talking about dissolution (piruk shutfut), check how the business is organized. A partnership, registered or not, is governed by the Partnerships Ordinance [New Version], 5735-1975, and by the agreement between the partners. A partnership can exist without a written agreement, based on what the partners actually did: worked together, invested together and shared profits.
When the business is a limited company and the partners are shareholders, the route is different: the exit mechanism in the shareholders' agreement, a sale of shares to the other partner or to a third party, and in a serious dispute an oppression claim (tvi'at kipuach) under section 191 of the Companies Law, 5759-1999. The difference changes the documents, the procedure and the liability for debts.
Sometimes there are both: a company that runs the business, and a property registered in the partners' own names. Each part is then dissolved under its own rules, and co-owned real estate is divided under the rules of partition of co-owned real estate.
When a Partnership Is Dissolved
The simple route is agreement: the partners decide to part ways, or the partnership agreement sets when and how. The Partnerships Ordinance also sets cases in which a partnership is dissolved without a special decision, such as completion of the venture for which it was formed, and a partnership for an undefined term is dissolved by notice from a partner. The partnership agreement can change some of these rules.
When there is no agreement, a partner may ask the court to order dissolution under section 45 of the Ordinance. The grounds: a partner who is permanently unable to perform his part, because of his mental state or for another reason; conduct by a partner that is likely to harm the business; a willful or persistent breach of the partnership agreement, which leaves the other partners no reasonable practical way to continue with him; a business that can no longer be carried on except at a loss; and circumstances in which the court considers dissolution an act of justice and equity.
The courts have held that a clause in the partnership agreement does not easily take away the right to apply to the court for dissolution, and that a loss of trust justifying dissolution must be objective and stem from a breach of duty, not only from one side's feelings.
The Partners' Duties on the Way to Dissolution
Even when relations have soured, the duties between the partners remain. Under section 29 of the Ordinance, partners must carry on the business for the common benefit, be honest and loyal to each other, and give each other true accounts and full information. A partner who hides income, moves clients to another business or withdraws money without consent breaches these duties.
A partner without access to the books and accounts can file a claim for an accounting. Such a claim proceeds in two stages: first the court decides whether there is a duty to render accounts, and then the accounts are rendered, their reliability is examined and the reckoning is made. When there is a concern that assets or money will disappear during the dispute, temporary orders can be requested at the start of the proceeding.
An Exit Agreement or Dissolution by Court
In most cases an orderly exit agreement is the better route. The agreement sets the value of the departing partner's share and how it is paid, who continues with the clients, the name, the equipment and the employees, who bears each debt and each personal guarantee to a bank or a landlord, and what each side may do after the separation. In a general partnership the partners are personally liable for the partnership's debts, so the arrangement with creditors matters as much as the division between the partners.
When the matter reaches the court, it may appoint a receiver or a manager to collect the partnership's assets, pay its debts and distribute the balance. As a rule, the debts to creditors are paid first, then the partners' loans and capital contributions are repaid, and the balance is divided according to their share in the profits, unless they agreed otherwise. A registered partnership notifies the Registrar of Partnerships at the Israel Corporations Authority of the dissolution.
What the service includes
- Reviewing the partnership agreement and the structure of the business
- Negotiating and drafting an exit agreement between partners
- Valuing a partner's share, with an accountant or a valuation professional
- Claims for an accounting
- Applications to dissolve a partnership in court and temporary orders
- Representation in arbitration where the agreement has an arbitration clause
When to contact us
- One of the partners wants to leave the business
- There is a dispute over profit sharing or withdrawals
- A partner refuses to give access to the accounts
- You received a dissolution notice or a claim from your partner
What to bring to the meeting
- The partnership agreement, the founders' agreement or the company's articles
- Financial statements and bank statements of the business
- A list of assets, debts and personal guarantees
- Correspondence between the partners
Dissolving a Partnership throughout Israel
The firm represents clients from all over Israel: Jerusalem and the Shfela, Be'er Sheva, Ashdod and Ashkelon, Haifa and the North, the Sharon and Gush Dan. Meetings take place at our two Modiin branches, at the WE Towers branch in Tel Aviv or by video call, and documents can be sent in advance on WhatsApp. We represent clients in the courts, the Labor Courts and before planning committees throughout Israel. How we work with clients across Israel.
Frequently asked questions
My partner wants to dissolve the partnership. Can I prevent it?
It depends on the partnership agreement. A partnership for an undefined term is dissolved by notice from a partner, unless agreed otherwise. Even under an agreement for a fixed term, a partner may ask the court for dissolution on one of the grounds in section 45 of the Partnerships Ordinance. Usually the practical question is not whether you part ways, but on what terms.
What is the difference between dissolving a partnership and exiting a limited company?
A partnership is governed by the Partnerships Ordinance and the partnership agreement. In a limited company the partners are shareholders, and an exit is made by selling shares under the shareholders' agreement. A shareholder who is oppressed can file an oppression claim under section 191 of the Companies Law. In a general partnership the partners are also personally liable for the business's debts.
My partner is hiding income from me. What can I do?
Section 29 of the Partnerships Ordinance requires partners to give each other true accounts and full information. You can demand to inspect the books, file a claim for an accounting, and in serious cases ask the court for dissolution. When there is a concern that money is being moved away, ask for a temporary order.
We have no written partnership agreement. How do we dissolve?
A partnership can exist without a written agreement. When there is no agreement, the rules of the Partnerships Ordinance apply, and you look at what the partners actually did: who invested, who worked and how profits were shared. On that basis you negotiate an exit agreement, and if there is no other choice you go to court.
Who is liable for the partnership's debts after dissolution?
Dissolution does not erase debts. In a general partnership the partners are personally liable to creditors for the partnership's debts, so the exit agreement sets who pays each debt and what happens to personal guarantees to a bank or a landlord. The agreement binds the partners, but not creditors who were not party to it.
