Keenan and Riches’BUSINESS LAW

Chapter 4Classification and survey of types of business organisation

are at risk as are the personal assets of the negligent
member, but not the personal assets of the other non-
negligent members.
This should only occur, however, if the member of
the LLP appears to have given a personal undertaking of
liability.

makes limited liability a bit of an illusion for them since,

if the company does not pay, they can be required to

do so.

Continuity

Sole traders

The death of a sole trader brings the organisation to an

end and the executors who are in charge of the sole

trader’s affairs will either have to sell the business as a

going concern to someone else or sell the assets one by

one to other businesses. Of course, if the assets of the

business have been left to a person by the will the exec-

utors have a duty to transfer those assets to that person as

part of the winding-up of the estate, unless it is necessary

to sell them to pay the deceased’s debts.

If a sole trader becomes bankrupt, there is no way in

which he can legally continue in business because if he

obtains credit beyond a prescribed amount (currently

£500) either alone or jointly with someone else, without

telling the person who gives the credit that he is an

undischarged bankrupt, he commits a criminal offence.

Partnerships

The death, bankruptcy or retirement of a partner in an

ordinary 1890 Act partnership can lead to the firm clos-

ing down business, but it is usual for the partnership

agreement to provide that the business shall continue

under the remaining partner or partners. However, the

continuing partners or sole partner (as he is perhaps

strangely called) will have to find the money to buy out

the share of the deceased, bankrupt or retiring partner.

Unless the firm has provided for this, it can cause dif-

ficulties in terms of raising the necessary funds.

As regards limited liability partnerships, clearly the firm,

being a persona at law, is not dissolved by the death,

bankruptcy or retirement of a member of the firm, but

the personal representatives or the former member on

retirement are entitled to receive any amount, e.g. by

way of repayment of capital, to which the former mem-

ber was entitled. This would, of course, involve the rais-

ing of the necessary funds and the same would be true

of the new ordinary partnership that is envisaged by

the Law Commission, which would also have a separate

legal personality.

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Example

A, B and C are the members of Grabbit & Run, LLP, a

firm of accountants. Let us suppose that one of their

clients is Boxo Ltd, a private company, whose owners

wish to sell it. They ask Grabbit and Run to prepare

financial statements showing the worth of the company

and to explain these statements to the would-be pur-

chaser. The work is allocated to A, who prepares the

statements negligently so that Boxo is overvalued. The

purchaser acquires the company at a valuation based on

the financial statements and suffers a loss. The pur-

chaser will have a claim against A in a personal capacity

if it appears that he was acting in a personal capacity

towards the purchaser. The other members will not have

personal liability in this situation. In an ordinary partner-

ship they would be jointly and severally liable with the

negligent partner. However, liability for the negligence of

a member of an LLP will not arise provided that when

carrying out work for the firm the member makes clear

on all documentation that he or she is acting as an agent

for the LLP. That way only the assets of the LLP will be

liable for loss caused by negligence. There will be no

personal duty of care in the negligent member and no

personal liability in the other members.

Companies

The rule of limited liability which says that a shareholder
in a company who has once paid for his shares in full
cannot be required to pay any more money into the
company even if it cannot pay its debts, does allow the
shareholders in a company to leave the company’s cred-
itors unpaid.
However, directors, and in some cases members, may
have personal liability. As far as directors are concerned,
this applies most commonly if they have continued to
trade and incur debts when the company was unable to
pay its existing debts. These matters will be dealt with
further in Chapter 6.
Also, company directors are, as we have seen, often
asked to give their personal guarantees of certain debts
of the company – for example, a bank overdraft. This