What Are the Liability of Partners After Exiting a Partnership in England?

Summary

• In a general partnership, each partner has unlimited personal liability for the partnership’s entire debts, and an ex-partner remains liable for debts incurred whilst they were a partner unless the creditor agrees to a novation expressly removing their liability from the existing agreement.
• An ex-partner can be liable for debts incurred after their departure if the creditor had no actual or constructive notice of their exit, with actual notice requiring the creditor to have had direct dealings with the partner and constructive notice achieved by publishing a notice of departure in the London Gazette.
• Departing partners should ensure the partnership agreement includes indemnity provisions entitling them to reimbursement from remaining partners for debts arising from the partnership’s post-departure actions, and should obtain appropriate insurance to mitigate claims that may arise after leaving.
• This article is a guide to ex-partner liability for departing partners in general partnerships in England and Wales, explaining the rules governing ongoing liability after leaving a partnership and the practical steps to mitigate personal exposure.
• LegalVision is a commercial law firm that specialises in advising clients on partnership law and business structures.

Tips for Businesses

Publish a notice of your departure in the London Gazette as soon as you leave a partnership to establish constructive notice and limit your liability for debts incurred by the partnership after your exit. Negotiate an indemnity from your former partners before departing, entitling you to reimbursement for any partnership debts you are required to settle after leaving. Draft a comprehensive partnership agreement before any partner joins that clearly addresses liability upon departure, indemnity arrangements, and exit procedures to avoid relying on the outdated default rules under the Partnership Act 1890.

Summarise with:

ChatGPT Gemini Perplexity Microsoft Copilot

Open now

---

On this page

• Partnerships as Unincorporated Entities 
• Liability of Ex-Partners 
• Practical Considerations
• What is Novation and How Does It Protect You?
• Key Takeaways 
• Frequently Asked Questions

When you leave a general partnership in the United Kingdom, your liability for the partnership’s debts does not automatically end on the date of your departure. General partnerships are governed by the Partnership Act 1890, which implies default rules into any partnership that lacks a written agreement or where that agreement is silent on a particular issue. Unlike a limited liability partnership registered under the Limited Liability Partnerships Act 2000, a general partnership offers no statutory shield against personal liability for its debts and obligations. Understanding how the 1890 Act operates, and how to contract out of its default provisions, is therefore essential for any departing partner seeking to protect their personal assets. 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 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 partnership is not a separate entity from its 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 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 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.

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 often contrary to modern practices, it is best practice to draft a thorough partnership agreement tailored to your business’s circumstances.

Liability of Ex-Partners 

Liability Incurred While a Partner

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.

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. 

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 treats a third-party creditor as having constructive knowledge of a partner’s exit when 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. 

What is Novation and How Does It Protect You?

Novation is one of the most effective ways to protect yourself from ongoing liability when you leave a partnership. A novation agreement is a three-party contract between you, your former partners, and the creditor. It formally replaces the original agreement, substituting the remaining partners as the liable parties in your place.

For novation to be effective:

• all three parties must agree to it in writing;
• the creditor must expressly release you from your obligations under the original contract; and
• the remaining partners must accept full responsibility for the debt going forward.

Without the creditor’s consent, novation cannot occur. You cannot simply agree with your former partners to transfer liability between yourselves and expect that to bind the creditor. In practice, novation is most straightforward when you are departing on good terms, and the creditor has an ongoing commercial relationship with the partnership. Where a creditor refuses to novate, your only protection may be an indemnity from your former partners.

An indemnity does not release you from the creditor’s claim. It simply gives you the right to recover any amount you pay from your former partners. This is a weaker protection than novation, particularly if the remaining partners lack sufficient assets.

Drafting the Partnership Agreement

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

In practice, this will involve an indemnity or settlement 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 partnership agreement should also outline how you can leave the partnership and what happens upon your departure.

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. 

Board Minutes - First Meeting of Directors

This template refers to the minutes of the first meeting of the directors of a Company.

Download Now

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 if 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 that 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, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced business lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.

Frequently Asked Questions