If you are or were a partner in a general partnership, you may wonder what your liability is after leaving a partnership. There are set rules that govern an ex-partner\u2019s liability to the partnership after they leave. Understanding these rules is crucial for protecting your personal assets and ensuring you are not unfairly held responsible for partnership debts incurred after your departure. This article will explore the implications of having a well-drafted partnership agreement and provide guidance on the necessary steps to mitigate potential liabilities through:<\/p>\n\n\n\n
A partnership arises automatically when two or more people act together with a common intent to make a profit. For the purpose of this article, we will focus on general partnerships, i.e not limited liability partnerships. Unlike a company<\/a>, a partnership is not a separate entity from its partners. As a result, it cannot enter into contracts, nor can anyone else sue the partnership. <\/p>\n\n\n\n Each partner is personally liable for the partnership\u2019s entire debts. Any partner who signs a contract in the name of the partnership binds the other partners, regardless of whether the other partners had any knowledge of it. Consequently, if a partner promises to pay a supplier, even if they do not consult other partners, the supplier can pursue each individual partner for payment under the agreement. It follows that each partner has unlimited liability<\/a> for the partnership’s debts and obligations. It is also important to note that any profits generated by the partnership will be divided equally between the partners, unless otherwise set out in a partnership agreement. Partners will be liable to pay income tax on their share of the profits.<\/p>\n\n\n\n A partnership agreement specifies the terms of the relationship between and among the partners. It is a contract that you can enforce between and among the partners. <\/p>\n\n\n\n Where there is no partnership agreement, or the agreement is silent on a particular issue, the law will imply its own terms from the Partnership Act 1890<\/em>. As many terms are outdated and often contrary to modern practices, it is best practice to draft a thorough partnership agreement tailored to your business’s circumstances.<\/p>\n\n\n\n For this article, we will assume that your partnership had no express term covering the rules regarding ex-partners\u2019 liability for partnership debts. We will then consider how you might draft terms in your agreement that are commercially sensible. <\/span><\/p>\n<\/div>\n\n\n\n If your partnership entered into an agreement with a supplier while you were still a partner, the supplier can legally chase you for the debt. This is true even if you are no longer a partner but were a partner when the contract was entered into.<\/span><\/p>\n\n\n\n However, you may be released from your liability if:<\/span><\/p>\n\n\n\n This amendment is called a novation. Following a novation to extinguish your liability, the supplier will have no claim against you for the particular debt which was novated. However, if other agreements have not been novated, then the partnership\u2019s creditor can still come after you under those agreements.<\/p>\n<\/div>\n\n\n\n In certain circumstances, you can be liable for any debts the partnership has incurred, even after you leave the partnership. For this to happen, the third-party creditor must have known that you were a partner and had no notice that you left the partnership before they entered into the new agreement that created the liability. <\/span><\/p>\n\n\n\n The law considers notice to be either:<\/span><\/p>\n\n\n\n Actual notice is where the third-party creditor possessed factual knowledge that you were no longer a partner. A key condition is that the creditor must have had actual dealings with you. <\/span><\/p>\n\n\n\n For instance, the supplier you have worked with previously calls and speaks to another partner. During the conversation, your partner informs the supplier that you are no longer a partner. Provided the supplier and partner have not entered into a new agreement before then, the law concludes that the supplier has actual notice that you are no longer a partner. <\/span><\/p>\n<\/div>\n\n\n\n The law treats a third-party creditor as having constructive knowledge of a partner\u2019s exit when the partnership publishes a notice in the<\/span> London Gazette<\/span><\/i><\/a>. The creditor does not have to have actual dealings with you for the law to say that the creditor has constructive knowledge of your departure.\u00a0<\/span><\/p>\n\n\n\n The effect is that, provided either the creditor has actual or constructive notice, if they subsequently enter into an agreement with your former partnership, you are not liable for the terms of the agreement. <\/span><\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\nPartnership Agreements<\/span><\/h3>\n\n\n\n
Liability of Ex-Partners <\/span><\/h2>\n\n\n\n
Liability Incurred While a Partner<\/span><\/h3>\n\n\n\n
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Liability Incurred After You Left <\/span><\/h3>\n\n\n\n
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Actual Knowledge <\/span><\/h3>\n\n\n\n
Constructive Knowledge <\/span><\/h3>\n\n\n\n
Effect of Notice<\/span><\/h3>\n\n\n\n