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8/19/2019 Liability After a Partner Retires
http://slidepdf.com/reader/full/liability-after-a-partner-retires 1/45
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$isting %rm does not therebybecome liable to the creditors of the %rmfor anything before he became a partner&
!'"A partner #ho retires from a %rm does notthereby cease to be liable for partnershipdebts or obligations incurred before hisretiremenet&
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!(" A retiring partner may be discharged fromany e$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$press orinferred as a fact from the course of dealingbet#een the creditors and the %rm as ne#lyconstituted&
• S& 19 provides that& +hole the business may
continue* any change in the composition of thepartnership mar,s the end of the relationshipand the creation of a ne# partnership&
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• -he rights and liabilities of themembers of the separate %rms are
separate and distinct&• .embers of the original %rm are
responsible for contractual
obligations incurred before thetermination date and ne#ly admittedpartners are not liable for those
obligations unless they e$pressly orby conduct accept the obligation&
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/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
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• -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&
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• -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&
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• +here the retiring partner is notreplaced by a ne# one* but the
continuing partners neverthelessagree to indemnify him againste$isting liabilities* consideration is
supplied by the detriment the retiringpartner #ill su)er in losing control ofthe partnership business&
• In many cases the consent of thecreditors or of the incoming partner#ill be a matter of inference to bedra#n from the general course of
dealing #ith the ne#ly constituted
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• S& 19 e$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&
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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&
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• -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&
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• 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&
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• 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$press or implieddischarge from liability* by #ay of
novation* or a separate agreement#ith the creditor su orted b
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• ;o#ever* even #here no such dischargecan be established* it may be that the
course of dealing bet#een the ne#lyconstituted %rm and the creditor*subse7uent to retirement* #ill have e)ecta change in the position* so as to relieve
that person of primary liability for the old%rm2s debts* as a principal debtor* and toplace him in the position of a surety ofguarantor&
• Applying the s&19 provisions* suppose *3* and are partners* retires and B >oinsthe %rm&
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• is liable for the debts etc& incurredup to the change by virtue of s&19!'"
and B becomes liable only for thosedebts incurred after the changeunder s&19!1"&
•As stated by a #riter in theory thisperfectly correct B had no controlover debts incurred before hebecame a partner and should not
be allo#ed to escape liability fore$isting debts simply by retiring fromthe %rm&
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• ;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$empted or
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!'" +hether it is a series of individualcontracts in #hich case the ne#
partner replaces the old for liabilitiesincurred after the change&
• An e$ample of a single continuingcontract giving rise to a singleliability already incurred at the date
of the change is:
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/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&
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• -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&
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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&
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• 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&
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• +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&
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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&
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• -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&
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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&
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!(" -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&
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• 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&
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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&
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-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&
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-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
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• 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$pressly relieves the retired partner fromliability #here he #as not ,no#n to be a partner
to the person see,ing to ma,e that personliable&
• -his means that for the retired partner to beliable* #hat #as once actually ,no#n to the
person dealing #ith the %rm must continue toappear to be true* although it has in fact*ceased to be true&
• -he operative #ords in s&(9!(" are 4not having
been ,no#n5&
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Go Gotice
• In the case of death or ban,ruptcy orthe retirement of a partner* is not,no#n to the person dealing #ith the%rm to have been a partner* the
estate of the deceased or theban,rupt partners* and the retiredpartner may obtain a statutory
e$emption from liability* #ithout there7uirement to give notice* asregards to the contractual obligationsof the continuing %rm incurred after
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• 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
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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&
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-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 !("&
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• 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&
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• -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&
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-an 0oon /heo v& ;o ;ong 0ang Ltd
• Prichard & e$plained the principle of la# as tothe position of a dormant partner #ho retires:
+hen a dormant partner retires he* need give nonotice of his retirement in order to free himselffrom liability in respect of acts done after hisretirement&
-he reason for this principle seems to be that ashe #as never ,no#n to be a partner* none canbe relied on his connection #ith the %rm* or trulyallege that #hen dealing #ith the %rm hecontinued to rely on the fact that the dormantpartner #as still connected there#ith&5
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• Princhard &* ho#ever* said that the la# seems*to be di)erent to that of an apparent partneror #hen the partnership bet#een several,no#n partners is dissolved&
• In this situation* according to Prichard &* those#ho dealt #ith the %rm before a change too,place #ere entitled to assume that no changehad occurred until they noticed to the contrary&
• It further included those persons #ho neverhad dealings #ith the %rm* and #ho only ,ne#
of its e$istence by repute* are entitled toassume that it still e$ists until something #asdone to notify publicly that it e$ists no longer&
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• 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&
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• +hen a ,no#n partner retires or a partnership isdissolved* e$plained Prichard * notice of the factis usually given to the #orld at large by
advertisement and to the old customers byspecial communication&
• As against persons #ho dealt #ith the %rmbefore any change in it too, place* Prichard
said that an advertisement #ithout more is oflittle or no value* #hether it be in the EaFette orelse#here&
• 0ut if notice in point of fact can be established* it
matters not by #hat means for the !PartnershipAct 1961" does not re7uire nor it ever been heldthat any particular formality must be observed&
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-an 0oon /heo v& ;o ;ong 0an, Ltd
-he court held that an advertisement in three
local /hinese ne#spapers of the dissolutionof a partnership #as not per se su@cientnotice to those having had dealings #ith the%rm #ho have not actually seen it although
they may be regular subscribers to thene#spaper&
In order to %$ 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$press notice mustbe given&
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• A partner cannot escape liability bymerely pleading resignation if the
partnership %rm incurred debtsbefore his resignation or retirement&
.alayan 0an,ing 0erhad v& Lim /heeLeng
ederal /ourt held that #here a
partnership %rm incurred a debt ontrust receipt before the partner2sresignation or retirement* they
cannot escape liability by merely
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In this case* the respondent #ere thepartners of a %rm called 0 /orporation&
-he appellant sued the respondent underthe -rust 8eceipt #hich matured andbecame payable on une 1* 19MN&
-he %rst and fourth respondent* resignedfrom the %rm on August '6* 19M6&
-he second respondent claimed that he#as no longer associated #ith the %rm&
-he appellants applied for summary >udgment but this #as refused&
-he appellant appealed&
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Lee ;un ;oe /o& /& held that a partner#ho retires from a %rm does not thereby
cease to be liable for partnership debts orobligations incurred before his retirement&
Lee ;un ;oe /& observed that thedefendants incurred the debt on the -rust
8eceipt before their resignation orretirement&
-he debt #as also due before their
resignation or retirement& -hey cannot escape liability by merely
pleading resignation or retirement&
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• A former partner cannot therefore be anapparent partner #ithin s&(<!1" if the
creditor never ,ne# him to be a partnerbefore his retirement&
• -hus* a partner #ho retires #ill be liablefor debts incurred after he retires unless:
!1";e gives actual notice of his retirementto e$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&
Recommended