liability after a partner retires

8/19/2019 Liability After a Partner Retires

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Liability of Incoming and Outgoing

Partners

• Section 19 of the Partnership Act 1961provides that:

!1"A person #ho is admitted as a partner

into an e$isting %rm does not therebybecome liable to the creditors of the %rmfor anything before he became a partner&

!'"A partner #ho retires from a %rm does notthereby cease to be liable for partnershipdebts or obligations incurred before hisretiremenet&



!(" A retiring partner may be discharged fromany e$isting liabilities by an agreement to that

e)ect bet#een himself and the members of the%rm as ne#ly constituted and the creditors* andthis agreement may be either e$press orinferred as a fact from the course of dealingbet#een the creditors and the %rm as ne#lyconstituted&

• S& 19 provides that& +hole the business may

continue* any change in the composition of thepartnership mar,s the end of the relationshipand the creation of a ne# partnership&



• -he rights and liabilities of themembers of the separate %rms are

separate and distinct&• .embers of the original %rm are

responsible for contractual

obligations incurred before thetermination date and ne#ly admittedpartners are not liable for those

obligations unless they e$pressly orby conduct accept the obligation&



/ourt v 0erlin

• /ourt #as a solicitor retained by apartnership to recover debt due to it&

• -he %rm consisted of 0erlin* the soleactive partner* and t#o dormantpartners&

• uring the solicitor2s #or, for the%rm the t#o dormant partnersretired&

• After the proceedings for recovery ofthe debt #ere completed the solicitor

sued 0erlin and the former partners



• -he dormant partners claimed that they#ere only liable for costs incurred up to thedate of their retirement&

• -he 3nglish /ourt of Appeal held they #erefully liable&

• -he contract entered into #hilst they #ere

partners #as 4one entire contract toconduct the action to the end5

• -he solicitor did not need to come for freshinstructions at each step of the action&

• -he dormant partners2 liability for costs#as for all the costs in the action&



• -he three situations provided by S&19 mayoccur contemporaneously&

• One partner* for e$ample* retires and #iththe consent of the continuing partners*sells that interest to a person #hom theyagree to accept in substitution for the

retiring partner&• -he creditors on being told of a ne#

constitution of the partnership agree toloo, to it in place of the old partnership&

• -he ,ind of arrangement is ,no#n asnovation* the substitution of a ne#contractual liability in consideration of a

release from an e$isting contact&



• +here the retiring partner is notreplaced by a ne# one* but the

continuing partners neverthelessagree to indemnify him againste$isting liabilities* consideration is

supplied by the detriment the retiringpartner #ill su)er in losing control ofthe partnership business&

• In many cases the consent of thecreditors or of the incoming partner#ill be a matter of inference to bedra#n from the general course of

dealing #ith the ne#ly constituted



• S& 19 e$pressly provides that the

inference to be dra#n from theconduct of the parties is purely oneof fact and the court have indicated

that they do not re7uire strongevidence to enable that inference offact to be dra#n&



8ol%e and 0an, of Australasia v&lo#er Salting /o&

• +*;** trading in partnership under the %rm name of4+illiam 8utledge /o&5 too, t#o of their cler,s* -and S into partnership&

• -he ne#ly constituted %rm continued to trade under

the same name and in the same manner* ,eepingthe same boo,s of account as the old %rm&

• -he old %rm #as indebted to the respondentcompany to the amount of <=*=== paun sterling and

it proved that this debt and the interest payable inrespect of it #ere regularly recorded in the appellant%rm2s boo,s of account* to #hich the ne# partners -and S* at all material times had full access&



• -he respondent company continued to deal#ith the %rm as ne#ly constituted&

It #as held:!i" -hat the creditors by dealing #ith the ne#lyconstituted %rm* #ith full ,no#ledge of thechange in its membership* had impliedly

agreed to accept the ne# %rm as debtors inthe place of the old %rm and

!ii"-hat the incoming partners* S and -* by theirconduct in not disputing the entries in the

%rm2s boo,s of account* had impliedly agreedto accept >oint liability #ith the partners ofthe old %rm for all the debts sho#n in thoseaccounts&



• S& 19 deals #ith liability to creditors&

• ?nder this section* the 7uestion is #hether

there has been a novation by the acceptanceof the ne# %rm2s liability to perform thecontract* in consideration of the release of theold %rm&

• -herefore* neither an agreement bet#een theold %rm and the other party to the contract noran agreement bet#een the old partners andthe ne# partner is* of itself* su@cient to e)ect

a novation* because in neither case is thereprivity of contract bet#een the ne# partnersand the other party to the original contract&



• If complete novation is to beachieved* all three parties* the old

%rm* the ne# %rm and the otherparty to the original contract mustconcur in the ne# arrangement&

S&19!(" PA 1961&• +here the retiring partner #ishes to

escape liability for obligations of the

old %rm* the onus is on him to proveeither an e$press or implieddischarge from liability* by #ay of

novation* or a separate agreement#ith the creditor su orted b



• ;o#ever* even #here no such dischargecan be established* it may be that the

course of dealing bet#een the ne#lyconstituted %rm and the creditor*subse7uent to retirement* #ill have e)ecta change in the position* so as to relieve

that person of primary liability for the old%rm2s debts* as a principal debtor* and toplace him in the position of a surety ofguarantor&

• Applying the s&19 provisions* suppose *3* and are partners* retires and B >oinsthe %rm&



• is liable for the debts etc& incurredup to the change by virtue of s&19!'"

and B becomes liable only for thosedebts incurred after the changeunder s&19!1"&

•As stated by a #riter in theory thisperfectly correct B had no controlover debts incurred before hebecame a partner and should not

be allo#ed to escape liability fore$isting debts simply by retiring fromthe %rm&



• ;o#ever* in practice contracts made#ith the %rm before the date of

change may produce liabilities afterthe date of change C is the ne#partner liable for such debts or theold partner absolvedD

• It seems the liability of the partnerdepend upon the follo#ing factors:

!1"+hether the contract is a singlecotinuing contract& In this case* theformer partner remains liable andthe ne# partner is e$empted or



!'" +hether it is a series of individualcontracts in #hich case the ne#

partner replaces the old for liabilitiesincurred after the change&

• An e$ample of a single continuingcontract giving rise to a singleliability already incurred at the date

of the change is:



/ourt v& 0erlin

• In this case / #as a solicitor retained by apartnership to recover debt due to it&

• -he %rm consisted of 0erlin* the sole active

partner* and t#o dormant partners&• uring the solicitor2s #or, for the %rm the

t#o dormant partners retired&

• After the proceedings for recovery of thedebt #ere completed the solicitor sued0erlin and the former partners for his costs&



• -he dormant partners claimed that they #ereonly liable for costs incurred up to the date oftheir retirement&

• -he 3nglish /ourt of Appeal held that they #erefully liable&

• -he contract entered into #hilst they #erepartners #as 4one entire contract to conduct the

action to the end5* the solicitor did not need tocome for fresh instructions at each step of theaction&

• If the liabilities accrue on a daybyday basis*

albeit under a single general contract* theretiring partner #ill cease to be liable onretirement and the ne# partner #ill ta,e overfrom the date of >oining&



0agel v& .iller

+here a %rm contracted to purchasevarious shipments of goods&

One of the partners died and it #as

held that his estate #as only liablefor the goods delivered before hisdeath and not for deliveries

after#ards&• in such standing supply contracts it isthe ne# partner #ho assumesresponsibility: y,e v 0re#er&



• A solution to this problem for retiringpartner is provided by S&19!("&

• -he section provides that: any retiring partner may be discharged

from any e$isting liabilities by an

agreement to that e)ect bet#een himselfand the members of the %rm as ne#lyconstituted and the creditors* and thisagreement may be #ither e$press or

inferred as a fact from the course ofdealing bet#een the creditor and the %rmas ne#ly constituted&



• +hat is re7uired by the provision is acontract of novation bet#een the creditor*the ne# or retiring partner and the otherpartners&

• -his is a tripartite agreement by #hich thecreditor accepts the ne# %rm as ta,ing

over liability for the debt from the old %rm&• If such an agreement is e$press then fe#

problems occur but it is far more li,ely tobe implied from the acts of all concerned&

• +hat amounts to a novation in suchcircumstances is a 7uestion of fact in eachcase&



8ol%e and 0an, of Australasia v&lo#er Salting /o

• -hree partners too, too, t#o of their cler, intopartnership&

• -he ne#ly constitued %rm continued to tradeunder the old name and no change #as made tothe business* even the accounts #ere continuedin the same #ay&

• -he company #as o#ed <=*=== paun sterling bythe old %rm !#ithout the cler,s"&

• -hat debt and the interest payable on it hadbeen ,ept in the accounts and #ere regularlyentered up&



• -he ne# partners had access to the boo,s&

• -he company continued to trade #ith the

ne# %rm&• -he Privy /ouncil found the ne# partners

liable for the old debt on the basis of impliednovation&

• -he company* by dealing #ith the ne# %rm#ith full ,no#ledge of the change ofmembership* had impliedly agreed to acceptthe ne# %rm as debtors in place of the old

%rm* and the partners* by not ob>ecting tothe accounts* had impliedly agreed toaccept liability for the debt&



Liability After A Partner8etires

• S& (< provides ( speci%c situations:

!1"+here a person deals #ith a %rm after a change in itsconstitution he is entitled to treat all apparentmembers of the old %rm as still being members of the

%rm until he has notice of the change&!'"An advertisement in the ederal EaFette as to a %rm

#hose principal place of business is in +est .alaysia*in the Sabah EaFette as to a %rm #hose principal placeof business is in Sabah* and in the Sara#a, EaFette as

to a %rm #hose principal place of business is inSara#a,* shall be notice to persons #ho had nodealings #ith the %rm before the date of dissolution orchange so advertised&



!(" -he estate of a partner #ho dies* or #hobecomes ban,rupt* or of a partner #ho* nothaving been ,no#n to the person dealing

#ith the %rm to be a partner* retires fromthe %rm* is not liable for partnership debtscontracted after the date of the death*ban,ruptcy or retirement respectively&

• S&(<!1" e$tends the liability of a formermember of the %rm to debts contracted

after his departure if he is still an4apparent member5 of the %rm and thecreditor has no notice of his retirement&



• S&(<!1" and '= concern the possibleliability of persons #ho #ere actuallypartners at one time* but #ho have ceased

to be partners at the time of the dealingupon #hich it is sought to ma,e them liable&

• -here are t#o di)erent types of dealers #ho

are regulated by s&(<:!i" -hose #ho had dealings #ith the %rm prior

to the change and

!ii"Persons #ho had no such dealings&

(•)In either case* ho#ever* the retired partner*if he is to be held liable* on the subse7uentdealings* must be an apparent partner atthe time of those dealings&



3lders Pastoral Ltd v& 8utherfurd• Ge# Healand /ourt of Appeal* Somers said

that:4-#o points must concur for liability to arise

under s&(<!1"J&

-he %rst is that #hich emerges from subs&!1" and !(" namely* that the person soughtto be made liable #as 4,no#n5 to thecreditor before actual retirement to have

been a partner&Bno#ledge in that sense #ould #e thin,include belief arising from general notorietyor the use of names on letterheads*

advertisements and the li,e&



-he second is that the former partner must still be an4apparent5 member&

-he ordinary meaning of apparent is visible* evident*

manifest to the understanding&In s&16J relating to holding out* the #ords Kapparentpartner5 are referable to one #ho represents himself*

or ,no#ingly su)ers himself to be represented* as apartner&

+e should thin, that a retired partner #ho gives nonotice may be an apparent partner if his namecontinues to be used&

-hat is something he can prevent or can counter by

notice of retirement&0ut #e do not thin, he can be said to be an

4apparent5 partner merely because a former partnersays he is still a partner5&



-o#er /abinet /o& v& Ingram

• 3nglish /ourt of Appeal

-he court held that apparent in ane7uivalent to s&(< of the PartnershipAct 1961 means apparent to the

person #ho dealt #ith the %rm* atthe time of the dealing* in the sensethat it must have been brought to his

actual ,no#ledge that the retiredpartner #as a partner before thereconstitution of the %rm* either by

direct communication or by common



• S&(<!1" of the Partnership Act 1961 is #ideenough to cover the case #here the retiredpartner is represented to be a partner at the

time of the transaction* but s&(<!1" must beread sub>ect to the provisions of s&(<!("* #hiche$pressly relieves the retired partner fromliability #here he #as not ,no#n to be a partner

to the person see,ing to ma,e that personliable&

• -his means that for the retired partner to beliable* #hat #as once actually ,no#n to the

person dealing #ith the %rm must continue toappear to be true* although it has in fact*ceased to be true&

• -he operative #ords in s&(9!(" are 4not having

been ,no#n5&



Go Gotice

• In the case of death or ban,ruptcy orthe retirement of a partner* is not,no#n to the person dealing #ith the%rm to have been a partner* the

estate of the deceased or theban,rupt partners* and the retiredpartner may obtain a statutory

e$emption from liability* #ithout there7uirement to give notice* asregards to the contractual obligationsof the continuing %rm incurred after



• A retiring partner #ho fails to givenotice* is protected to the e$tent that

a former association #ith thepartnership is un,no#n&

• A former active partner in the %rm

might adopt this course of conductupon receipt of an appropriateindemnity from all members of the

continuing %rm* but in general* thisstatutory e$emption from liability #illonly protect a former dormantpartner&

3ld P t l Ltd



3lders Pastrol Ltd v&8utherfurd

• -he court said that:

-he natural meaning of s&(<!("J isthat a partner #ho retires from the%rm and #as not ,no#n to thecreditor before the retirement tohave been a member of the %rm isnot liable to the creditor for post

retirement debts& -his matches s&(<!1"J #hich spea,s

of 4apparent members of the %rm5&



-he use of the #ord 4still5 indicatesthat the creditor must have ,no#n

that the partner #ho has retired #asa member of the old %rm&

Liability then continues because of

#ant of notice and apparentcontinuing membership&

• 0ut such liability can be defeatedeither by actual notice to the creditorconcerned or by using the provisionsof subsection !'" and !("&



• If the creditor has never dealts #ith the%rm before the change it #ill be su@cient

if the retiring partner has placed anappropriate annoucement in the gaFette&

• Actual notice therefore need only begiven to e$isting customers prospective

customers must read the small print&

• A complete e$emption applies* ho#ever*under s&(<!(" of the Act* if the former

partner has dies or become ban,rupt* orif the person dealing #ith the %rm did not,no# him to be a partner&



• -herefore* a retiring partner #ho#ould line to escape the liability of

the partnership %rm must give noticethat he had ceased to be a partner ofthe %rm&

• ;ere it seems a distinction is madebet#een 4a dormant partner #horetires5 and an 4apparent partner

#ho retires5&• -here are also di)erent methods of

notice to be given to ne# customersof the %rm and to old customers&



-an 0oon /heo v& ;o ;ong 0ang Ltd

• Prichard & e$plained the principle of la# as tothe position of a dormant partner #ho retires:

+hen a dormant partner retires he* need give nonotice of his retirement in order to free himselffrom liability in respect of acts done after hisretirement&

-he reason for this principle seems to be that ashe #as never ,no#n to be a partner* none canbe relied on his connection #ith the %rm* or trulyallege that #hen dealing #ith the %rm hecontinued to rely on the fact that the dormantpartner #as still connected there#ith&5



• Princhard &* ho#ever* said that the la# seems*to be di)erent to that of an apparent partneror #hen the partnership bet#een several,no#n partners is dissolved&

• In this situation* according to Prichard &* those#ho dealt #ith the %rm before a change too,place #ere entitled to assume that no changehad occurred until they noticed to the contrary&

• It further included those persons #ho neverhad dealings #ith the %rm* and #ho only ,ne#

of its e$istence by repute* are entitled toassume that it still e$ists until something #asdone to notify publicly that it e$ists no longer&



• Prichard & observed that in the caseof an old customer* he is entitled to a

more speci%c notice that a person#ho never dealt #ith the %rm at all&

• On this point* the >udge said that in

considering #hether notice ofdissolution or retirement is or is notsu@cient* distinction must be made

according to the person #ho soughtto be a)ected by notice* #as or #asnot a customer of the old %rm&



• +hen a ,no#n partner retires or a partnership isdissolved* e$plained Prichard * notice of the factis usually given to the #orld at large by

advertisement and to the old customers byspecial communication&

• As against persons #ho dealt #ith the %rmbefore any change in it too, place* Prichard

said that an advertisement #ithout more is oflittle or no value* #hether it be in the EaFette orelse#here&

• 0ut if notice in point of fact can be established* it

matters not by #hat means for the !PartnershipAct 1961" does not re7uire nor it ever been heldthat any particular formality must be observed&



-an 0oon /heo v& ;o ;ong 0an, Ltd

-he court held that an advertisement in three

local /hinese ne#spapers of the dissolutionof a partnership #as not per se su@cientnotice to those having had dealings #ith the%rm #ho have not actually seen it although

they may be regular subscribers to thene#spaper&

In order to %$ them #ith the ,no#ledge of thefact that a partner has retired so as prevent

from holding a retiring partner liable for debtsincurred after retirement* e$press notice mustbe given&



• A partner cannot escape liability bymerely pleading resignation if the

partnership %rm incurred debtsbefore his resignation or retirement&

.alayan 0an,ing 0erhad v& Lim /heeLeng

ederal /ourt held that #here a

partnership %rm incurred a debt ontrust receipt before the partner2sresignation or retirement* they

cannot escape liability by merely



In this case* the respondent #ere thepartners of a %rm called 0 /orporation&

-he appellant sued the respondent underthe -rust 8eceipt #hich matured andbecame payable on une 1* 19MN&

-he %rst and fourth respondent* resignedfrom the %rm on August '6* 19M6&

-he second respondent claimed that he#as no longer associated #ith the %rm&

-he appellants applied for summary >udgment but this #as refused&

-he appellant appealed&



Lee ;un ;oe /o& /& held that a partner#ho retires from a %rm does not thereby

cease to be liable for partnership debts orobligations incurred before his retirement&

Lee ;un ;oe /& observed that thedefendants incurred the debt on the -rust

8eceipt before their resignation orretirement&

-he debt #as also due before their

resignation or retirement& -hey cannot escape liability by merely

pleading resignation or retirement&



• A former partner cannot therefore be anapparent partner #ithin s&(<!1" if the

creditor never ,ne# him to be a partnerbefore his retirement&

• -hus* a partner #ho retires #ill be liablefor debts incurred after he retires unless:

!1";e gives actual notice of his retirementto e$isting creditors or

!'";e puts a notice in the relevant EaFette

for prospective creditors or

!("-he creditor did not ,no# that he #as apartner at the time #hen he retired&

liability after a partner retires

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