Potential pitfalls for new business partners

13 August 2011

The Scottish courts have recently seen partnership disputes over liability for debts and payments when a business run as a partnership takes on a new partner. It is common for partnerships to assume new members and there can be a number of ways that new member can ensure they are protected from the past liabilities of the business. Under the 1890 Partnership Act, all partners in a firm are jointly liable for debts.

Firstly, the payment of a lump sum into the partnership would be one act that would be looked at when assessing if a partnership was indeed a 'new' one – even if it continues to trade under an old name. Crucially, a new set of accounts should be drawn up from when the new partnership begins. If this is not done, payment of capital will not alone be enough to rebut the presumption of liability. Conversely, a retiring partner may not cease to be liable for debts unless the parties have expressly contracted out of this default rule.
A recent case highlights these rules. In Sim v Howat and McLaren ([2011] CSOH 115) which involved well-known Solicitor partnership Pattison and Sim, two incoming partners tried to argue they were not liable for prior debts and making payments to a retiring partners pension fund. However, it was shown that on their assumption as partners, no new accounts had been created, and payment for work undertaken by both the old and 'new' partnership were not apportioned as such. Therefore, they were responsible for meeting these expenses.


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