Grounds for the Dissolution of an Ordinary Partnership

Grounds for Termination of an Ordinary Partnership (Art. 639 of the Turkish Code of Obligations)

Examining the matter in terms of the general provisions:

• Achievement of the Purpose Provided for in the Partnership Agreement or Its Becoming Impossible (Article 639(1) TCO)
• Death of One of the Partners, Where the Agreement Contains No Provision for Continuing the Partnership with the Heirs (Article 639(2) TCO)
• Restriction of a Partner’s Legal Capacity, a Partner’s Bankruptcy, or the Realisation of a Partner’s Liquidation Share through Enforcement, Where the Agreement Contains No Rule on the Continuation of the Partnership (Article 639(3) TCO)
• Unanimous Decision of All the Partners (Article 639(4) TCO)
• Expiry of the Term Agreed for the Partnership (Article 639(5) TCO)
• Termination of the Partnership Relationship by Notice (Article 639(6) and Article 640 TCO)
• Dissolution of the Partnership for Just Cause by Court Order (Article 639(7) TCO)

Achievement or Impossibility of the Purpose

What is meant by purpose here is the object of the partnership. The object of the partnership may be, for example, the construction of a sports facility. In that case, the partnership will come to an end automatically upon completion of the construction. Here, two companies with legal personality may have formed an ordinary partnership for the construction. Once the work is completed, the partnership relationship between them will also have come to an end.

The object may become impossible for legal or factual reasons. The impossibility must arise after the partnership has been formed. It must also be permanent, clear and objective. After the object has become impossible, the partners may continue their partnership by changing its object.

Death of One of the Partners

The death of one of the partners will cause the partnership to terminate.

An ordinary partnership may be operating a commercial enterprise. Bearing such situations in mind, and in order to prevent the partnership from ceasing to exist abruptly and entirely upon the death of one of the partners, the partnership may continue to exist for a further period under the provisions of the partnership agreement or under an agreement concluded subsequently. The partnership agreement may also regulate the circumstances in which the heirs will or will not join the partnership as partners.

Legal Restriction, Bankruptcy and Enforced Realisation of a Share

Restriction of legal capacity: If one of the partners is placed under a restriction of legal capacity as a result of the circumstances set out in Articles 405 to 408 TCC, the partnership will be dissolved. This is because, once the person’s capacity has been restricted, transactions relating to the partnership will have to be carried out through a legal representative. However, factors such as the person of the partner within the partnership, their trustworthiness and the harmony between the partners are essential for the continuity of an ordinary partnership. For these reasons, the ordinary partnership is dissolved. However, if the partnership agreement provides otherwise, for instance that the partnership will continue in the event of restriction, or that the partner concerned will be excluded or will withdraw from the partnership after the restriction, the partnership is not dissolved.

Bankruptcy: Since an ordinary partnership has neither legal personality nor merchant status, it cannot be declared bankrupt. However, if one of the partners is declared bankrupt, the bankrupt partner’s share in the partnership must be transferred to the bankruptcy estate. For this reason, the partnership is dissolved and liquidated. In this case too, if the agreement provides otherwise, the partnership may be continued with the remaining partners, with the bankrupt partner withdrawing or being excluded from the partnership. Otherwise, the partnership will be dissolved as a result of the Commercial Court’s adjudication of bankruptcy.

Realisation of a Partner’s Liquidation Share through Enforcement: The realisation of the liquidation share through enforcement means that the share is purchased by another person. Where this occurs, it is not feasible for the other partners to continue the partnership with a person they do not know at all. For this reason, the partnership will be dissolved unless the agreement provides otherwise.

Unanimous Decision to Dissolve

The requirement that the partners decide unanimously to dissolve the partnership is a sound rule. However, provisions to the contrary may also be included in the agreement. Just as the partnership may be dissolved by such a decision, it may also be dissolved implicitly. In an ordinary partnership with two partners, if one partner transfers its shares to the other partner, no partnership relationship will remain. A decision to dissolve the partnership is constitutive in nature. The partnership relationship will therefore end upon the adoption of the decision. After deciding to terminate the partnership relationship, the partners may agree that the decision is to take effect at a later date.

Expiry of the Agreed Term

The partners may conclude an ordinary partnership agreement for an indefinite term or for a fixed term. Under a partnership agreement concluded for a fixed term, the partnership ends upon expiry of the term. However, if, despite the expiry of the term, the businesses connected with the partnership continue to operate and salaries continue to be paid to employees, the partnership is implicitly renewed as a partnership for an indefinite term.

Action for Dissolution on Just Grounds

In an ordinary partnership, the partners may bring an action for dissolution for just cause. The right of action belongs to the partners and cannot be restricted or excluded by contractual provisions. In partnerships for a fixed term, this action may be brought before the term expires. For the partnership to be dissolved for just cause, the partner must submit this request to the court. Once the action is brought, the other partners become necessary co-defendants.

Just cause in this context must be an objective reason making it clear that the partner can no longer continue the partnership relationship. This is for the court to assess. The cause may arise from external factors or from one of the partners. The judgment given by the court here is constitutive, and the partnership will be dissolved once the judgment becomes final.

Dissolution by Notice of Termination

If the ordinary partnership was formed for an indefinite term, the partners may dissolve it by notice of termination. The notice of termination is not subject to any formal requirement. However, if the partnership was formed to operate a commercial enterprise, the notice of termination must be given through a notary public or by registered letter, in accordance with the principles set out in Article 18/3 of the Turkish Commercial Code.

Giving notice of termination is one of the partners’ absolute rights. It cannot be excluded by contractual provisions. Under the Law, notice of termination must be given six months in advance. This period is provided because the partners need time to put their affairs in order. It may be shortened or extended by a contrary provision in the agreement. The right to give notice of termination must be exercised in accordance with the principle of good faith. This is because, at the time one partner gives notice, the partnership’s business may be in a phase of expansion or its profits may be increasing. In particular, the fact that the partner giving notice no longer has any interest in the partnership while the other partners’ interests continue may operate to prevent termination.

Action for termination for just cause and notice of termination

Liquidation of a Simple Partnership

The dissolution of an ordinary partnership has two consequences. The first is that the manager’s duties come to an end. In all forms of dissolution other than dissolution by notice of termination, all transactions carried out in good faith by the manager until the manager is notified of the dissolution continue to produce effects vis-à-vis the partners. Indeed, where the partnership is dissolved by the death of one of the partners, whether the deceased was the managing partner or the other partners were managers, the partnership’s affairs continue for a further period in accordance with the principle of good faith.

The other consequence of dissolution is that the partnership enters the liquidation stage. When the partnership is dissolved, the partnership bond does not disappear abruptly; rather, the liquidation stage begins. Through liquidation, the partnership’s assets will be converted into money, its debts will be paid, the assets contributed as capital will be returned to the partners and, if any sum then remains, it will be distributed among the partners in accordance with the principles for sharing profits and losses.

Upon entering the liquidation stage, the purpose of the partnership changes from making a profit and generating income to the purpose of liquidation. After this stage, the partnership may not enter into new, profit-making transactions.

The provisions of the Turkish Code of Obligations on liquidation are not mandatory. In other words, the manner of liquidation may be determined by including provisions on liquidation in the partnership agreement or by a subsequent decision. Such provisions may entirely displace the statutory procedure or may modify it. An example is the transfer of the partnership, together with its business, to one partner without liquidation once the partnership reaches the liquidation stage.

Under the statutory procedure, liquidation is carried out jointly by all the partners. However, this would make the liquidation process difficult and burdensome. The legislator has therefore provided that liquidation may be carried out by a liquidator appointed by the partners from among themselves. If they cannot appoint one themselves, each partner may apply to the court for the appointment of a liquidator.

Once appointed in either of these two ways, the liquidator begins the liquidation process. The liquidator is entitled to remuneration for the work performed. This remuneration may be determined by the partners; if it is not, the judge sets the remuneration having regard to the nature of the work done and the partnership’s income. This remuneration is paid out of the partnership’s assets. If it cannot be covered by the partnership’s assets, the partners are jointly and severally liable for it.

Stages of Liquidation

The article describes liquidation in five stages:

1. Conversion into cashThe partnership’s assets are converted into cash and its receivables are collected.
2. Payment of debtsThe partnership’s debts to third parties and to the partners are paid.
3. Masraf ve avanslarThe expenses incurred and advances made by the partners are paid.
4. Sermayenin iadesiThe items contributed by the partners as capital are returned.
5. Distribution of profit or lossThe remaining profit or loss is distributed in accordance with the principles for sharing profit and loss.

1. The liquidator first converts the partnership’s assets into money and collects the partnership’s receivables. Enforcement proceedings may be brought against debtors who fail to pay their debts.

2. At the second stage, the partnership’s debts are paid. The partnership’s debts may be owed to third parties, and the partners’ claims against the partnership also fall within this scope.

3. At this stage, the expenses incurred and advances made by the partners are repaid. However, in order to claim these, they must be proved. The burden of proof lies on the partner concerned.

4. The return of what the partners contributed as capital is the fourth stage. This stage is carried out in respect of the assets remaining after the other three stages. If no assets remain after payment of the partnership’s debts, it will not be possible to return the capital contributed either. Either the use of an asset or its ownership may have been contributed to the partnership as capital. Therefore, at the stage of returning capital, if the use of an asset was allocated, the asset will be returned in kind to the partner. However, if ownership was contributed to the partnership as capital, the asset will be converted into money and its value returned to the partner concerned; there is no return in kind. Before the partnership’s assets are sold at public auction, they may be sold to a partner who wishes to buy them. An asset converted into money is returned on the basis of the value stated in the agreement as its capital value. Any gain or loss in the value of the asset over time is irrelevant; its value at the time it was contributed as capital is taken as the basis. Furthermore, it is the capital actually contributed, not the capital undertaken, that is returned.

5. The final step, if any liquid assets remain, is the distribution of the assets to the partners as liquidation profit. If, however, a loss rather than a profit remains, the loss is likewise passed on to the partners. This profit and loss is distributed in accordance with the principles for sharing profits and losses. (Article 643 TCO)

Sources Used

• ŞENER, O. Teorik ve Uygulamalı Ortaklıklar Hukuku [Theoretical and Applied Partnership Law], Seçkin, Ankara 2019
• BOZKURT, T. Şirketler Hukuku, Legem, Ankara 2016