Plain language law

New Zealand law explained for everyone

Limited Partnerships Act 2008

General - Distributions to partners

42: Solvency test

You could also call this:

"Checking if a limited partnership has enough money to pay its debts"

Illustration for Limited Partnerships Act 2008

When you are in a limited partnership, you need to check if it is solvent before paying out money to partners. You do this by checking two things: if the partnership can pay its debts on time and if its assets are worth more than its debts. The assets are the things the partnership owns and the debts are the money it owes.

To work out if the partnership's assets are worth more than its debts, you must think about all the things that might affect their value. You can use reasonable estimates of how much the assets and debts are worth. This helps you make a fair decision about whether the partnership is solvent.

When you are working out the value of a debt that might happen in the future, you can think about how likely it is to happen. You can also think about if the partnership has a claim that could help reduce or get rid of the debt. You can find more information about this in s 4.

You must consider all these things to decide if the limited partnership is solvent and can pay out money to partners. This is an important check to make sure the partnership is financially healthy. It helps you make good decisions about the partnership's money.

This text is automatically generated. It might be out of date or be missing some parts. Find out more about how we do this.

This page was last updated on

View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1139191.

Topics:
Business > Starting a businessBusiness > Industry rules
Previous

41: Distribution must not be authorised unless limited partnership solvent, or

"Don't pay partners if the business can't afford to pay its debts."

Next

43: Liability of general partner to repay unauthorised distribution, or

"General partners must pay back money if they break the rules and give out too much."

Part 2General
Distributions to partners

42Solvency test

  1. A limited partnership is solvent for the purposes of the payment of a distribution if—

  2. the limited partnership is able to pay its debts as they become due in the normal course of business; and
    1. the value of the limited partnership’s assets is greater than its liabilities, including its contingent liabilities.

      1. In determining whether the value of the limited partnership’s assets is greater than its liabilities, a general partner—

      2. must have regard to all circumstances that the general partner knows or ought to know affect, or may affect, the value of the limited partnership’s assets and the value of its liabilities, including its contingent liabilities; and
        1. may rely on valuations of assets or estimates of liabilities that are reasonable in the circumstances.

          1. In determining, for the purposes of this section, the value of a contingent liability, account may be taken of—

          2. the likelihood of the contingency occurring; and
            1. any claim that the limited partnership is entitled to make and can reasonably expect to be met to reduce or extinguish a contingent liability.

              Compare