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Liability of Incoming and Outgoing

Partners
Section 19 of the Partnership Act 1961
provides that:(1)A person who is admitted as a partner
into an existing firm does not thereby
become liable to the creditors of the firm
for anything before he became a partner.
(2)A partner who retires from a firm does not
thereby cease to be liable for partnership
debts or obligations incurred before his
retiremenet.

(3) A retiring partner may be discharged from


any existing liabilities by an agreement to that
effect between himself and the members of the
firm as newly constituted and the creditors, and
this agreement may be either express or
inferred as a fact from the course of dealing
between the creditors and the firm as newly
constituted.
S. 19 provides that. Whole the business may
continue, any change in the composition of the
partnership marks the end of the relationship
and the creation of a new partnership.

The rights and liabilities of the


members of the separate firms are
separate and distinct.
Members of the original firm are
responsible for contractual
obligations incurred before the
termination date and newly admitted
partners are not liable for those
obligations unless they expressly or
by conduct accept the obligation.

Court v Berlin
Court was a solicitor retained by a
partnership to recover debt due to it.
The firm consisted of Berlin, the sole
active partner, and two dormant
partners.
During the solicitors work for the
firm the two dormant partners
retired.
After the proceedings for recovery of
the debt were completed the solicitor
sued Berlin and the former partners

The dormant partners claimed that they


were only liable for costs incurred up to the
date of their retirement.
The English Court of Appeal held they were
fully liable.
The contract entered into whilst they were
partners was one entire contract to
conduct the action to the end;
The solicitor did not need to come for fresh
instructions at each step of the action.
The dormant partners liability for costs
was for all the costs in the action.

The three situations provided by S.19 may


occur contemporaneously.
One partner, for example, retires and with
the consent of the continuing partners,
sells that interest to a person whom they
agree to accept in substitution for the
retiring partner.
The creditors on being told of a new
constitution of the partnership agree to
look to it in place of the old partnership.
The kind of arrangement is known as
novation, the substitution of a new
contractual liability in consideration of a
release from an existing contact.

Where the retiring partner is not


replaced by a new one, but the
continuing partners nevertheless
agree to indemnify him against
existing liabilities, consideration is
supplied by the detriment the retiring
partner will suffer in losing control of
the partnership business.
In many cases the consent of the
creditors or of the incoming partner
will be a matter of inference to be
drawn from the general course of
dealing with the newly constituted

S. 19 expressly provides that the


inference to be drawn from the
conduct of the parties is purely one
of fact and the court have indicated
that they do not require strong
evidence to enable that inference of
fact to be drawn.

Rolfie and Bank of Australasia v.


Flower Salting & Co.
W,H,F, trading in partnership under the firm name of
William Rutledge & Co. took two of their clerks, T
and S into partnership.
The newly constituted firm continued to trade under
the same name and in the same manner, keeping
the same books of account as the old firm.
The old firm was indebted to the respondent
company to the amount of 80,000 paun sterling and
it proved that this debt and the interest payable in
respect of it were regularly recorded in the appellant
firms books of account, to which the new partners T
and S, at all material times had full access.

The respondent company continued to deal


with the firm as newly constituted.
It was held:(i) That the creditors by dealing with the newly
constituted firm, with full knowledge of the
change in its membership, had impliedly
agreed to accept the new firm as debtors in
the place of the old firm; and
(ii)That the incoming partners, S and T, by their
conduct in not disputing the entries in the
firms books of account, had impliedly agreed
to accept joint liability with the partners of
the old firm for all the debts shown in those
accounts.

S. 19 deals with liability to creditors.


Under this section, the question is whether
there has been a novation by the acceptance
of the new firms liability to perform the
contract, in consideration of the release of the
old firm.
Therefore, neither an agreement between the
old firm and the other party to the contract nor
an agreement between the old partners and
the new partner is, of itself, sufficient to effect
a novation, because in neither case is there
privity of contract between the new partners
and the other party to the original contract.

If complete novation is to be
achieved, all three parties, the old
firm, the new firm and the other
party to the original contract must
concur in the new arrangement.
[S.19(3) PA 1961.
Where the retiring partner wishes to
escape liability for obligations of the
old firm, the onus is on him to prove
either an express or implied
discharge from liability, by way of
novation, or a separate agreement

However, even where no such discharge


can be established, it may be that the
course of dealing between the newly
constituted firm and the creditor,
subsequent to retirement, will have effect
a change in the position, so as to relieve
that person of primary liability for the old
firms debts, as a principal debtor, and to
place him in the position of a surety of
guarantor.
Applying the s.19 provisions, suppose D,
E, and F are partners, F retires and K joins
the firm.

F is liable for the debts etc. incurred


up to the change by virtue of s.19(2)
and K becomes liable only for those
debts incurred after the change
under s.19(1).
As stated by a writer in theory this
perfectly correct K had no control
over debts incurred before he
became a partner and F should not
be allowed to escape liability for
existing debts simply by retiring from
the firm.

However, in practice contracts made


with the firm before the date of
change may produce liabilities after
the date of change is the new
partner liable for such debts or the
old partner absolved?
It seems the liability of the partner
depend upon the following factors:(1)Whether the contract is a single
cotinuing contract. In this case, the
former partner remains liable and
the new partner is exempted or

(2) Whether it is a series of individual


contracts in which case the new
partner replaces the old for liabilities
incurred after the change.
An example of a single continuing
contract giving rise to a single
liability already incurred at the date
of the change is:-

Court v. Berlin
In this case C was a solicitor retained by a
partnership to recover debt due to it.
The firm consisted of Berlin, the sole active
partner, and two dormant partners.
During the solicitors work for the firm the
two dormant partners retired.
After the proceedings for recovery of the
debt were completed the solicitor sued
Berlin and the former partners for his costs.

The dormant partners claimed that they were


only liable for costs incurred up to the date of
their retirement.
The English Court of Appeal held that they were
fully liable.
The contract entered into whilst they were
partners was one entire contract to conduct the
action to the end, the solicitor did not need to
come for fresh instructions at each step of the
action.
If the liabilities accrue on a day-by-day basis,
albeit under a single general contract, the
retiring partner will cease to be liable on
retirement and the new partner will take over
from the date of joining.

Bagel v. Miller
Where a firm contracted to purchase
various shipments of goods.
One of the partners died and it was
held that his estate was only liable
for the goods delivered before his
death and not for deliveries
afterwards.
in such standing supply contracts it is
the new partner who assumes
responsibility: Dyke v Brewer.

A solution to this problem for retiring


partner is provided by S.19(3).
The section provides that: any retiring partner may be discharged
from any existing liabilities by an
agreement to that effect between himself
and the members of the firm as newly
constituted and the creditors, and this
agreement may be wither express or
inferred as a fact from the course of
dealing between the creditor and the firm
as newly constituted.

What is required by the provision is a


contract of novation between the creditor,
the new or retiring partner and the other
partners.
This is a tripartite agreement by which the
creditor accepts the new firm as taking
over liability for the debt from the old firm.
If such an agreement is express then few
problems occur but it is far more likely to
be implied from the acts of all concerned.
What amounts to a novation in such
circumstances is a question of fact in each
case.

Rolfie and Bank of Australasia v.


Flower Salting & Co
Three partners took took two of their clerk into
partnership.
The newly constitued firm continued to trade
under the old name and no change was made to
the business, even the accounts were continued
in the same way.
The company was owed 80,000 paun sterling by
the old firm (without the clerks).
That debt and the interest payable on it had
been kept in the accounts and were regularly
entered up.

The new partners had access to the books.


The company continued to trade with the
new firm.
The Privy Council found the new partners
liable for the old debt on the basis of implied
novation.
The company, by dealing with the new firm
with full knowledge of the change of
membership, had impliedly agreed to accept
the new firm as debtors in place of the old
firm, and the partners, by not objecting to
the accounts, had impliedly agreed to
accept liability for the debt.

Liability After A Partner


Retires
S. 38 provides 3 specific situations:(1)Where a person deals with a firm after a change in its
constitution he is entitled to treat all apparent
members of the old firm as still being members of the
firm until he has notice of the change.
(2)An advertisement in the Federal Gazette as to a firm
whose principal place of business is in West Malaysia,
in the Sabah Gazette as to a firm whose principal place
of business is in Sabah, and in the Sarawak Gazette as
to a firm whose principal place of business is in
Sarawak, shall be notice to persons who had no
dealings with the firm before the date of dissolution or
change so advertised.

(3) The estate of a partner who dies, or who


becomes bankrupt, or of a partner who, not
having been known to the person dealing
with the firm to be a partner, retires from
the firm, is not liable for partnership debts
contracted after the date of the death,
bankruptcy or retirement respectively.
S.38(1) extends the liability of a former
member of the firm to debts contracted
after his departure if he is still an
apparent member of the firm and the
creditor has no notice of his retirement.

S.38(1) and 20 concern the possible


liability of persons who were actually
partners at one time, but who have ceased
to be partners at the time of the dealing
upon which it is sought to make them liable.
There are two different types of dealers who
are regulated by s.38:(i) Those who had dealings with the firm prior
to the change; and
(ii)Persons who had no such dealings.
()In either case, however, the retired partner,
if he is to be held liable, on the subsequent
dealings, must be an apparent partner at
the time of those dealings.

Elders Pastoral Ltd v. Rutherfurd


New Zealand Court of Appeal, Somers J said
that: Two points must concur for liability to arise
under [s.38(1)].
The first is that which emerges from subs.
(1) and (3) namely, that the person sought
to be made liable was known to the
creditor before actual retirement to have
been a partner.
Knowledge in that sense would we think
include belief arising from general notoriety
or the use of names on letterheads,
advertisements and the like.

The second is that the former partner must still be an


apparent member.
The ordinary meaning of apparent is visible, evident,
manifest to the understanding.
In [s.16] relating to holding out, the words apparent
partner are referable to one who represents himself,
or knowingly suffers himself to be represented, as a
partner.
We should think that a retired partner who gives no
notice may be an apparent partner if his name
continues to be used.
That is something he can prevent or can counter by
notice of retirement.
But we do not think he can be said to be an
apparent partner merely because a former partner
says he is still a partner.

Tower Cabinet Co. v. Ingram


English Court of Appeal
The court held that apparent in an
equivalent to s.38 of the Partnership
Act 1961 means apparent to the
person who dealt with the firm, at
the time of the dealing, in the sense
that it must have been brought to his
actual knowledge that the retired
partner was a partner before the
reconstitution of the firm, either by
direct communication or by common

S.38(1) of the Partnership Act 1961 is wide


enough to cover the case where the retired
partner is represented to be a partner at the
time of the transaction, but s.38(1) must be
read subject to the provisions of s.38(3), which
expressly relieves the retired partner from
liability where he was not known to be a partner
to the person seeking to make that person
liable.
This means that for the retired partner to be
liable, what was once actually known to the
person dealing with the firm must continue to
appear to be true, although it has in fact,
ceased to be true.
The operative words in s.39(3) are not having
been known.

No Notice
In the case of death or bankruptcy or
the retirement of a partner, is not
known to the person dealing with the
firm to have been a partner, the
estate of the deceased or the
bankrupt partners, and the retired
partner may obtain a statutory
exemption from liability, without the
requirement to give notice, as
regards to the contractual obligations
of the continuing firm incurred after

A retiring partner who fails to give


notice, is protected to the extent that
a former association with the
partnership is unknown.
A former active partner in the firm
might adopt this course of conduct
upon receipt of an appropriate
indemnity from all members of the
continuing firm, but in general, this
statutory exemption from liability will
only protect a former dormant
partner.

Elders Pastrol Ltd v.


Rutherfurd

The court said that: The natural meaning of [s.38(3)] is


that a partner who retires from the
firm and was not known to the
creditor before the retirement to
have been a member of the firm is
not liable to the creditor for postretirement debts.
This matches [s.38(1)] which speaks
of apparent members of the firm.

The use of the word still indicates


that the creditor must have known
that the partner who has retired was
a member of the old firm.
Liability then continues because of
want of notice and apparent
continuing membership.
But such liability can be defeated
either by actual notice to the creditor
concerned or by using the provisions
of subsection (2) and (3).

If the creditor has never dealts with the


firm before the change it will be sufficient
if the retiring partner has placed an
appropriate annoucement in the gazette.
Actual notice therefore need only be
given to existing customers prospective
customers must read the small print.
A complete exemption applies, however,
under s.38(3) of the Act, if the former
partner has dies or become bankrupt, or
if the person dealing with the firm did not
know him to be a partner.

Therefore, a retiring partner who


would line to escape the liability of
the partnership firm must give notice
that he had ceased to be a partner of
the firm.
Here it seems a distinction is made
between a dormant partner who
retires and an apparent partner
who retires.
There are also different methods of
notice to be given to new customers
of the firm and to old customers.

Tan Boon Cheo v. Ho Hong Bang Ltd


Prichard J. explained the principle of law as to
the position of a dormant partner who retires: When a dormant partner retires he, need give no
notice of his retirement in order to free himself
from liability in respect of acts done after his
retirement.
The reason for this principle seems to be that as
he was never known to be a partner, none can
be relied on his connection with the firm, or truly
allege that when dealing with the firm he
continued to rely on the fact that the dormant
partner was still connected therewith.

Princhard J., however, said that the law seems,


to be different to that of an apparent partner
or when the partnership between several
known partners is dissolved.
In this situation, according to Prichard J., those
who dealt with the firm before a change took
place were entitled to assume that no change
had occurred until they noticed to the contrary.
It further included those persons who never
had dealings with the firm, and who only knew
of its existence by repute, are entitled to
assume that it still exists until something was
done to notify publicly that it exists no longer.

Prichard J. observed that in the case


of an old customer, he is entitled to a
more specific notice that a person
who never dealt with the firm at all.
On this point, the judge said that in
considering whether notice of
dissolution or retirement is or is not
sufficient, distinction must be made
according to the person who sought
to be affected by notice, was or was
not a customer of the old firm.

When a known partner retires or a partnership is


dissolved, explained Prichard J, notice of the fact
is usually given to the world at large by
advertisement and to the old customers by
special communication.
As against persons who dealt with the firm
before any change in it took place, Prichard J
said that an advertisement without more is of
little or no value, whether it be in the Gazette or
elsewhere.
But if notice in point of fact can be established, it
matters not by what means for the (Partnership
Act 1961) does not require nor it ever been held
that any particular formality must be observed.

Tan Boon Cheo v. Ho Hong Bank Ltd


The court held that an advertisement in three
local Chinese newspapers of the dissolution
of a partnership was not per se sufficient
notice to those having had dealings with the
firm who have not actually seen it although
they may be regular subscribers to the
newspaper.
In order to fix them with the knowledge of the
fact that a partner has retired so as prevent
from holding a retiring partner liable for debts
incurred after retirement, express notice must
be given.

A partner cannot escape liability by


merely pleading resignation if the
partnership firm incurred debts
before his resignation or retirement.
Malayan Banking Berhad v. Lim Chee
Leng
Federal Court held that where a
partnership firm incurred a debt on
trust receipt before the partners
resignation or retirement, they
cannot escape liability by merely

In this case, the respondent were the


partners of a firm called B Corporation.
The appellant sued the respondent under
the Trust Receipt which matured and
became payable on June 14, 1975.
The first and fourth respondent, resigned
from the firm on August 26, 1976.
The second respondent claimed that he
was no longer associated with the firm.
The appellants applied for summary
judgment but this was refused.
The appellant appealed.

Lee Hun Hoe Co. C.J held that a partner


who retires from a firm does not thereby
cease to be liable for partnership debts or
obligations incurred before his retirement.
Lee Hun Hoe C.J observed that the
defendants incurred the debt on the Trust
Receipt before their resignation or
retirement.
The debt was also due before their
resignation or retirement.
They cannot escape liability by merely
pleading resignation or retirement.

A former partner cannot therefore be an


apparent partner within s.38(1) if the
creditor never knew him to be a partner
before his retirement.
Thus, a partner who retires will be liable
for debts incurred after he retires unless:
(1)He gives actual notice of his retirement
to existing creditors or
(2)He puts a notice in the relevant Gazette
for prospective creditors or
(3)The creditor did not know that he was a
partner at the time when he retired.