Kidwells Articles

Partnership Accounts Bind Retired Partner

It is not often understood that a partnership is created when 2 or more people engage in an activity with a view to a profit and unless you have a specific partnership agreement ,the Partnership will be dealt with by Law that dates back to 1890.  This way of dealing with the partnership is not cost effective and certainly not advisable. Therefore a partnership agreement is the best and safest way to progress.

Partnership is, of course, about money and businesses which operate as a partnership usually obtain their funding, at least in part, from the partners themselves. Each partner's earnings are credited to their individual account, and money they withdraw from the partnership is deducted from it.

When a partner retires, there will almost always be an amount due from the partnership to the partner or vice versa. A partnership agreement therefore normally contains a provision that the final partnership accounts for any period will bind the partners, so that there is agreement over the amount due to or from the retiring partner as demonstrated in the completed accounts.

It is not unusual for figures in the firm’s accounts to be disputed by the exiting partner who will claim that the accounts do not bind them.  Recently the courts dealt with precisely such a claim when an ex-partner contended that he was not bound by partnership accounts that covered the year during which he left the partnership.

The argument was that the relevant clause of the partnership agreement, which contained a procedure for contesting accounts and which bound ‘all partners’, did not apply to the retired partner at the time the accounts were prepared because he was no longer a partner.

The Court of Appeal made short shrift of the claim, deciding that the point of such a clause was to bind anyone who had been a partner in the business for any part of the year in question. It was clearly not intended to create a situation in which some of the partners during the year would be bound by the accounts and others not.

To prevent this situation, draft a Partnership agreement for with your business setting out the precise terms. Don’t rely on luck in drafting your own as they can be more problematic and considerably more expensive for the courts to sort out when there are difficulties.

Of course, the liability reaches deeper than monies owed between the partners as the retiring partner remains liable to the partnership creditors for the period that he was a partner. The drafting of the agreement needs to deal with indemnities for the retiring partner in order to provide some protection to the retiring partner; simply retiring does not protect that partner. It is very important to note that any person or company that dealt with the partnership prior to the retirement may still hold the retiring partner liable for the contract debts after he has retired unless they are specifically notified that the partner has retired and therefore the retirement needs to be published.

It is common knowledge that debts are traced back into the assets of the partners when things go wrong and this does on some occasions mean the loss of the family home and other assets.  In order to ensure you are receiving the correct care on this complex subject it is advisable to seek advice from a Lexcel accredited Solicitors.

For a free initial consultation on this or any other legal matter, please call Kidwells Law Solicitors Limited 01432 278 179.

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The information provided here is given for general information purposes and does not constitute legal advice. Regulated by the SRA no 00491008.