Liability for the Firm's Debts

Question 1

When will a firm be liable?

Answer 1

When actions have been actually authorised or for action which were not actually authorised but have appeared to an outsider to be authorised

Question 2

What section of the PA 1890 deals with partner’s authority?

Answer 2

s5 (There is no equivalent provision for companies in the CA 2006)

Question 3

What are the three examples of actual authority?

Answer 3

a) The partners acted jointly in making the contract and are therefore not at liberty to change their minds
b) Express Actual Authority - The partners may have EXPRESSLY instructed on of the partners to represent the firm in a particular transaction or type of transaction. The partner is then acting with actual authority and the firm is bound by any contract that parter makes within the scope of that authority.
c) Implied Actual Authority - The partners may have IMPLIEDLY accepted that one or more of the partners have the authority to represent the firm in a particular type of transaction. If all the partners are actively involved in running the business without any limitations being agreed between them, it will be implied that each partner has authority. Alternatively authority may be implied by a regular course of dealing by one of the partners in which the other have acquiesced.

Question 4

What is apparent authority?

Answer 4

This refers to a situation where a partnership may be held liable for actions that were not explicitly authorised but appear to be authorised to an outsider.

Question 5

Under s5 of the PA 1890, what are the circumstances where a firm can be held liable under apparent authority?

Answer 5

• Nature of Business: The firm can be held liable if the transaction is related to the type of business the firm is engaged in, according to what an outsider would reasonably expect.
• Usual Authority: If the transaction is something a partner in that firm would typically be expected to do in the ordinary course of business.
• Lack of Knowledge: The other party involved in the transaction didn’t know that the partner didn’t actually have the authority to act.
• Dealing with a Partner: The other party interacted with someone they knew or believed to be a partner.

Question 6

What is the consequence for a partner who acts in a way that makes the firm liable under a contract?

Answer 6

The partner will be personally liable to the other party under the contract

Question 7

If a partner acts without actual authority but makes the firm liable through apparent authority, what responsibility does the partner have?

Answer 7

The partner is liable to indemnify fellow partners for any resulting liability or loss

Question 8

In addition to contract liability, what type of liability might the firm face for acts like negligence?

Answer 8

The firm might face tortious liability for wrongful acts of a partner

Question 9

According to Section 10 of the PA 1890, under what circumstances is the firm liable for the wrongful acts of a partner?

Answer 9

The firm is liable when a partner acts in the ordinary course of the firm’s business or with the authority of the partner’s partners

Question 10

What does Section 12 state about the liability of each partner in the firm?

Answer 10

Section 12 states that every partner is liable jointly and severally for everything for which the firm becomes liable under Section 10

Question 11

Which sectio of the PA 1890 governs tortious liability?

Answer 11

10

Question 12

Who can be sued for the firms liability?

Answer 12

A) Partner who made the contract can be sued individually
B) The firm can be sued and in fact any claim should be commenced against the partnership if it is appropriate to do so (CPR Part 7, PD 7, 5A.1 and 5A.3). All those who were partners at the time when the debt or obligation was incurred are jointly liable to satifsy judgment (PA 1890, ss9 and 17, Civil Liability Contribution Act 1978 s3).
C) Any person who was a partner at the time when the debt or obligation was incurred can be sued individually. But any partner who is sued entitled to claim an indemnity from the remaining partners so the liability is shared between them.
D) Although generally someone who left the firm since that time is not liable (PA 1890, s 17) such a person may be sued or made liable for a judgment against the firm as a result of:
(i) holding out
(ii) failure to give appropriate notice of retirement
(iii) a novation agreement

Question 13

Why is it most appropriate to sue in the firms nams?

Answer 13

This way if judgment is obtained in the claimants favour, it can be enforced against the partnership assets as well as potentially the assets owned personally by any of the partners.

Question 14

What is ‘holding out’ in the context of partnership law?

Answer 14

When a creditor of a partnership has relied on a representation that a particular person was a partner in that firm, they may be able to hold that person liable for the firms’ debt (PA 1890, s14)

Question 15

What kind of representation must be made when it comes to ‘holding out’?

Answer 15

It can be oral, written or conduct

Question 16

Who must make the representation when ‘holding out’?

Answer 16

It could be the person themselves or, provided it is made with the person’s knowledge, by another person.

Question 17

Which test is used to determine liability under s14?

Answer 17

The test from Nationwide Building Society which states there had to be (a) holding out, (b) reliance thereon, and (c) the consequent giving of credit to the firm

Question 18

What happens to the liability of partners for the firm’s debts when a partner retires from a partnership?

Answer 18

Partners who were part of the firm when a debtor obligation was incurred remain liable, even if a partner retires. To safeguard against this, terms for purchasing a partner’s share should include provisions for indemnification.

Question 19

Under what circumstances can a partner be held liable for acts of their former partners after leaving the firm?

Answer 19

If a partner leaves the partnership (e.g., through retirement or expulsion), s 36 of the Partnership Act 1890 requires the departing partner to give notices:
(a) Actual notice to those who dealt with the firm before leaving.
(b) Advertisement in the London Gazette (or Edinburgh Gazette for Scotland) for those who did not deal with the firm prior to the departure.

Question 20

What is the basis of liability under s 36, and does it require the creditor’s reliance on a representation?

Answer 20

Unlike s 14, liability under s 36 doesn’t depend on creditor reliance. It is based on the right of a creditor to assume the partnership continues unchanged until proper notice is given.

Question 21

When is notice not required under s 36?

Answer 21

If a creditor was never aware that a person was a partner, no notice is required, as the creditor cannot be assuming the person’s continuance in the partnership (s 36(3)).

Question 22

In cases of death or bankruptcy, is notice required for ceasing to be a partner?

Answer 22

No, notice is not required if the reason for ceasing to be a partner is death or bankruptcy, and the estate of the deceased or bankrupt partner is not liable for events occurring after the death or bankruptcy

Question 23

What is a novation agreement in the context of partnership law?

Answer 23

A novation agreement is a tripartite contract involving the creditor, the partners at the time of the original contract, and the newly constituted partnership. It allows for the release of original partners from liability, with the newly constituted partnership taking over the responsibility.

Question 24

Under a novation agreement, how might a retiring partner be released from an existing debt?

Answer 24

In a novation agreement, a retiring partner may be released from an existing debt, often while substituting an incoming partner. This benefits the retiring partner but can be disadvantageous to the incoming partner, who usually agrees to this as part of broader partnership terms.

Question 25

Is advertisement in the London Gazette required for a creditor to be aware of a partner’s retirement under a novation agreement?

Answer 25

Yes, if a creditor has never dealt with the partnership previously but is aware of a partner, the retirement must be advertised in the London Gazette. The advertisement serves as deemed notice to the creditor.

Question 26

How does a novation agreement differ from an indemnity in relation to existing debts?

Answer 26

A novation agreement is a tripartite contract involving the creditor, the old partners, and the new partnership. It releases a retiring partner from an existing debt. An indemnity, on the other hand, is a bipartite agreement between the retiring partner and other partners, not binding the creditors, who can still sue the retired partner.

Question 27

What options does a creditor have if a partner cannot pay?

Answer 27

A creditor can sue the firm as a group or individually sue any liable partners.
If judgment is obtained against an individual partner who cannot pay, the creditor can initiate new proceedings against the firm.
Judgment against the firm, even if it cannot pay from its assets, can be enforced against the private assets of any liable person.
If none of these methods satisfy the creditor’s claim, it indicates insolvency, likely leading to insolvency proceedings.

Question 28

What happens if a firm is insolvent?

Answer 28

Insolvency proceedings are likely to follow.
Insolvency of a partnership and its partners is governed by the Insolvent Partnerships Order 1994 (as amended by SI 2002/1308) and the Insolvency Act 1986.
A partnership, though not a separate legal entity, can be wound up as an unregistered company or utilize rescue procedures similar to companies, such as a ‘voluntary arrangement’ or an ‘administration order’

Question 29

Is a partnership subject to bankruptcy laws?

Answer 29

No, a partnership is not governed by bankruptcy laws applicable to individuals. Instead, it may be subject to a winding-up order, and individual partners may face bankruptcy orders

Question 30

In a partnership joint venture involving companies, what should the agreement address in the event of insolvency?

Answer 30

The agreement needs to provide a mechanism to unwind the joint venture if one party is heading for insolvency.