Deferred rights of profit-sharing lenders PA 1890 s. 3
Under PA 1890 s. 3, profit-sharing lenders and goodwill sellers cannot claim in insolvency until other money creditors are paid 100p in the pound.
In the event of any person to whom money has been advanced by way of loan upon such a contract as is mentioned in the last foregoing section, or of any buyer of a goodwill in consideration of a share of the profits of the business, being adjudged a bankrupt, entering into an arrangement to pay his creditors less than 100p in the pound, or dying in insolvent circumstances, the lender of the loan shall not be entitled to recover anything in respect of his loan, and the seller of the goodwill shall not be entitled to recover anything in respect of the share of profits contracted for, until the claims of the other creditors of the borrower or buyer for valuable consideration in money or money’s worth have been satisfied.
Text in force at .
Source: legislation.gov.uk — The National Archives (legislation.gov.uk), reproduced under licence Open Government Licence v3.0.
What it actually says
When a business borrower or goodwill buyer becomes bankrupt, enters a composition paying creditors less than 100p in the pound, or dies insolvent, certain profit-linked claims are postponed.
This rule applies specifically to lenders who advanced money under a profit-sharing contract and sellers of goodwill who agreed to receive a share of profits in exchange for the sale.
These deferred lenders and sellers cannot recover any part of their loan or agreed profit share until every other creditor for valuable consideration in money or money's worth has been fully satisfied.
When it applies
- An investor who advanced money to a sole trader in exchange for a share of business profits attempts to prove their debt after the trader is declared bankrupt.
- A former owner who sold business goodwill in return for ongoing profit payments submits a claim alongside trade creditors when the buyer enters insolvency.
- A lender under a profit-sharing loan agreement seeks repayment from the estate of a deceased borrower whose debts exceed their assets.
What this section does not say
- Standard fixed-interest loans without profit-sharing terms, which rank alongside other ordinary unsecured debts.
- The general rules for determining whether a profit-sharing arrangement creates a partnership, which are governed by pa1890s.2.
- The automatic dissolution of a partnership caused by bankruptcy or death, which is covered under pa1890s.33.
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This page reproduces the text of PA 1890 s. 3 in force at the date shown and explains it in general terms. It is not legal advice and takes no account of the circumstances of your case, which can change the answer completely. For a live dispute, for limitation periods, and before taking any step in court, consult a qualified lawyer in England and Wales.