Law guide: Business start-up

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Liability of outgoing partners

Liability of outgoing partners

The general rule is that someone who has left the firm before the debts and liabilities were created won't be liable for those debts and liabilities.

However, the person may still be liable in the following situations discussed below.

Person liable by holding out

If a person represents themselves (or 'holds themselves out') as a partner at the time the debts were incurred, the creditor of the partnership who relied on this representation can hold that person liable for those debts. The person could have made the representation orally, in writing or even implying it in their behaviour. The representation can also be made by the partnership or by another person, as long as the partner held out knew about it and did nothing to correct the representation.

Person liable by failure to notify leaving

Partners leaving the partnership, must give notice that they're leaving, otherwise they can become liable for debts incurred after they leave. The notices should include:

  • actual notice to all those who have dealt with the partnership before the partner leaves; and
  • an advertisement in The Gazette to tell anyone else who did business with the partnership.

A creditor might be unaware of the partner's leaving because the type of notice appropriate to them wasn't given. In this case, the creditor will be able to take action against the former partner for the firm's debts, even though they're no longer a partner.

This is because the creditor can assume that the membership of the partnership continues unchanged until proper notice is given.

No notice needs to be given that a partner has died or become bankrupt. That partner won't be liable for the debts or liabilities incurred after their death or bankruptcy.

Liability under a novation agreement

A novation agreement is a 3-way contract involving the creditor of the firm, the partner leaving and a new incoming partner. Under a novation agreement, the parties can agree that the creditor will release the partner who is leaving from their liability and instead, the incoming partner will take on the liability.

Related services

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  • Partnership agreement
    Compatible region(s): England Wales

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