ACCA F4 - Corp and Business Law (ENG)

172 11: Partnerships  Part D The formation and constitution of business organisations

Partners are also jointly liable for crimes and torts committed by one of their number in the course of

business.

5 Liability of partners in an unlimited liability

partnership

Partners are jointly liable for all partnership debts that result from contracts that the partners have made

which bind the firm.

Partners are jointly liable for all partnership debts that result from contracts made by other partners

which bind the firm. The Civil Liability Act 1978 provides that judgement against one partner does not

prevent subsequent actions against other partners. The link between authority and liability can be seen in

the following diagram.

The firm (that is, all the individual partners) is liable under the contract

The individual partner only is liable

YES

NO NO NO NO

Did the

partner have

actual

authority?

Did the

transaction

relate to the

business

carried on by

the firm?

Would a partner

in such a firm

usually have

authority to

do this?

Did the other

party know, or

have reason

to know, that

the partner

had no

authority?

Did the

other party

know, or

believe that

the ‘partner’

was a partner?

YES YES

YES

NO YES

There are particular rules on liability for new and retiring partners.

Partner Partner liability

New partners A new partner admitted to an existing firm is liable for debts incurred only after

they become a partner. They are not liable for debts incurred before they were a

partner unless they agree to become liable.

Retiring

partners

A partner who retires is still liable for any outstanding debts incurred while they

were a partner, unless the creditor has agreed to release them from liability. They

are also liable for debts of the firm incurred after their retirement if the creditor

knew them to be a partner (before retirement) and has not had notice of their

retirement.

Therefore, it is vital on retirement that a partner gives notice to all the creditors of

the firm. The retiring partner may have an indemnity from the remaining partners

with respect to this issue.

5.1 Supervision and regulation

There is no formal statutory supervision or regulation of partnerships. Their accounts need not be in

prescribed form nor is an audit necessary. The public has no means or legal right of inspection of the

firm's accounts or other information such as companies must provide. If, however, the partners carry on

business under a firm name which is not the surnames of them all, say, 'Smith, Jones & Co', they are

required to disclose the names of the partners on their letterheads and at their places of business. They

are required to make a return of their profits for income tax and usually to register for VAT.

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