In the recent case of Sim v Howat & McLaren [2011] CSOH 115, the Commercial Court of the Court of Session has undertaken a detailed examination of Partnership Law in Scotland, before ruling that a new partnership constituted by an incoming partner is liable for the prior business debts of the business.
Facts
The action concerns the liability of Pattison & Sim to a pension fund in respect of an employee of the firm who had retired in 1998. The Pursuer, William Sim, had been a partner in Pattison & Sim until his retirement in 2006. Between 1995 and 1999 the firm comprised Mr Sim and David Howat (the First Defender). In 1999 Bridget McLaren (the Second Defender) joined the partnership.
When the current firm of Pattison & Sim received a claim on behalf of a pension fund for payment of outstanding contributions, a dispute arose as to who was liable for these sums, as it impacted upon the enforcement of Mr Sim's retirement agreement.
Decision
In Lord Hodge's view, the question to be considered was whether the new partnership had assumed responsibility for the prior debts of the business, including contingent liabilities - not whether the partners were aware of the extent or the precise nature of those liabilities.
Lord Hodge highlighted four factors in this case that strongly supported the inference that the new partnership had assumed responsibility for the prior liabilities of the business:
- On the assumption of a new partner, the business of Pattison & Sim continued with no outward change;
- Pattison & Sim did not keep separate accounts for the partnership from 1995 to 1999, and for the new partnership from 1999 to 2006;
- The fees due for work that the former partnership and new partnership carried out were not apportioned, but treated as income of the new partnership; and
- The liabilities incurred in the course of business were not allocated between the former partnership and the new partnership, but were paid by the new partnership.
Having regard to all the circumstances, Lord Hodge ruled that the partnership of Pattison & Sim as it was constituted between 1999 and 2006 did assume responsibility for the prior business debts of the practice, including the contingent liability to the pension fund.
Comment
The Law of Partnership in Scotland can be notoriously tricky. For example, an incoming partner to a partnership which continues its business without winding up the prior partnership, may face a risk that the prior accounts are not accurate in all respects and that there are unknown liabilities to be met. Ignorance will not prevent an incoming partner from being found liable for the prior partnership's contingent liabilities. As such, it is important that incoming and outgoing partners take legal advice to ensure their position is protected.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
