Liability of Partners After Exiting a Partnership in England

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’s 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:

• novation;
• indemnities; and
• insurance policies.

Partnerships as Unincorporated Entities 

A partnership automatically arises when two or more people act together with a common view to making a profit. Unlike a company, the partnership is not its own entity separate from the partners. As a result, it cannot enter into contracts, nor can anyone else sue the partnership. 

Each partner is personally liable for the partnership’s debts as a whole. Partner 1 binds the rest of the partnership to any obligations she agrees to, regardless of whether the other partners had any knowledge. Consequently, if Partner 1 promises to pay a supplier, even if she does not consult you, the supplier can pursue each individual partner for payment under the agreement. It follows that each partner has unlimited liability for the debts and obligations of the partnership.

Partnership Agreements

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. 

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. As many terms are outdated and frequently contrary to modern practices, it is best practice to draft a thorough partnership agreement. 

Liability of Ex-Partners 

Liability Incurred While a Partner

If your partnership entered 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 you entered the contract. 

However, you may be released from your liability if:

• the partners amend the agreement with the supplier expressly removing your liability; and 
• the supplier agrees to the amendment. 

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’s creditor can still come after you under those agreements. 

Liability Incurred After You Left 

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. 

The law considers notice to be either:

• actual; or 
• constructive.

Actual Knowledge 

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. 

Constructive Knowledge 

The law considers a third-party creditor to have constructive knowledge of a partner’s exit where the partnership publishes a notice in the London Gazette. 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. 

Effect of Notice

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. 

Practical Considerations

If your partnership lacks any agreement or is silent about your liability towards the partnership after you leave, you are clearly in a vulnerable position. In effect, if the partnership’s creditor chooses to go after you, it has a claim against you unless:

• the partnership and the creditor have novated the agreement; or 
• the partnership enters into an agreement after you leave, and the creditor has actual or constructive knowledge of your exit. 

Of course, the partnership may refuse to grant you an indemnity. Alternatively, there may be insufficient assets to cover their liabilities, so the creditor sees your personal assets as the quickest way to settle the debt. 

Drafting the Partnership Agreement

For the reasons outlined above, it is always advisable to draft the partnership agreement so that your liability ends when you leave. 

In practice, this will involve an indemnity agreement between the outgoing partner (you) and the current partners. It will typically entitle you to seek an indemnity (reimbursement) from the other partners for any debts or associated costs you incur due to the partnership’s actions. The agreement may be effective immediately after you leave or for a specified period after the fact. 

Typically, the indemnity agreement will not apply if:

• the debt relates to your personal tax liability; or
• it is owed to some negligent or fraudulent activity you undertook either while a partner or after the fact. 

Insurance 

Further, it is prudent that you and your partners obtain an insurance policy that can mitigate any claims affecting you after your departure. 

Key Takeaways 

Even when you exit a partnership business, you may still be liable for its debts. If you do not have a partnership agreement in place or it is silent on the matter, the law will imply its own rules into your partnership. Notably:

1. If the partnership incurred the liability (or entered into the agreement giving rise to the liability) while you were still a partner, you are still liable for the debt. 
2. If the partnership incurred the liability or entered into the relevant agreement after you left, you will be liable unless: 

• the creditor had actual dealings with you and had no knowledge you left the partnership; or 
• the partnership did not publish notice of your absence in the London Gazette. 

If you need help with your business, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions