New Partnership - Old Liabilities?

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...