tinuing partners, either alone or with the addition of any
new partners.
The use of a novation is rare except perhaps in the case
of banks which may well release an outgoing partner if
they have enough cover from the other partners includ-
ing any new partner in terms of a guarantee of the firm’s
indebtedness.
Creditors are not forced to accept or take part in
novation and may continue to regard the retiring part-
ner as liable for debts incurred while he was a partner. If
this is so, the retiring partner should get an indemnity
from the continuing partners. This will not release him
from liability to the creditors but if he does have to pay
a pre-retirement debt, he can recover what he has paid
in full under the indemnity, and not just a contribution
which is all he could recover without the indemnity.
The indemnity approach is much more common than
the novation approach. It is in any case impractical to
use a novation where there are a considerable number of
creditors. It would be a lengthy and difficult process to
get, say, 100 trade creditors to join in a novation. In fact,
the indemnity is often found in the partnership agree-
ment which may have a clause such as ‘In the event of
retirement the remaining partners shall take over the
liabilities of the firm’.4 Notifying retirement.The law requires a retiring
partner to notify his retirement. The reason for this is
that people who deal with the firm are entitled, in all
fairness, to assume when they do business with it that all
the partners are the same unless there has been notice
of a change.
The rules are set out in s 36 which states, in effect, that
if X, who was a partner in Y & Co, leaves the firm and
the firm contracts with Z who knew that X was a mem-
ber of the firm but does not know that he has left, X
will be liable to Z (along with other partners of course)
if the firm does not meet its obligations. To avoid this
liability there must have been adequate notice of X’s
retirement.In order to indicate what adequate notice is, the law
divides creditors into three classes as follows:1 Creditors who have previously dealt with the firm
and who knew X was a partner.In this case it is neces-
sary to show that the creditor received actual notice of
the retirement. This may be by a letter from the firm,
or by receiving a letter from the firm on which X’s name
is deleted, or by seeing the notice of retirement in ThePart 2Business organisations
122
Liability of incoming and outgoing
partnersNow we shall deal with the period during which the part-
ner is liable for the firm’s debts, or, to put it in another
way, from what date do his co-partners become his
agents and when does that agency come to an end?
There are four things to look at as set out below.
1 Admission as a partner.Under s 17, a person does
not simply by becoming a partner take on liability for
debts or torts incurred by the firm before he joined it.
He can if he wishes take on this liability by a process
called novation (see below).
The position of incoming partners, or joiners as they
are sometimes called, was affirmed by the High Court in
HF Pension Scheme Trustees Ltd v Ellison(1999) where
it was decided that, since the relationship of partners
was based on agency, an incoming partner could not be
liable as a principal in terms of his personal capacity for
the negligence of a co-partner that took place before he
joined the firm, because the negligent acts could not
have been done on his behalf.
2 Retirement as a partner.Also under s 17, a person
does not, by retiring, cease to be liable for the debts and
obligations of the firm incurred before he retired. The
law is not likely to allow a partner to avoid his liabilities
simply by retiring from the firm.
A retiring partner is not liable for future debts or
liabilities unless, as we have seen, he is held out under
s 14 or under s 36 because he has not given proper notice
of his retirement. (See below.)
The date on which the contract was made or order
given decides the matter of liability. So in a contract for
the sale of goods, A, a retired partner, will be liable if the
contract or order was made or given when he was a part-
ner, even if the goods were delivered after he had retired.
3 Novation and indemnity.Under s 17, a retiring part-
ner may be discharged from liabilities incurred before
retirement if an agreement to that effect, called a nova-
tion, is made with the following people as parties to it:
■the partners who are to continue the business;
■the creditor concerned; and
■the retiring partner.
The agreement releases the retiring partner from his
liabilities and accepts in his place the liability of the con-