Northgate partnership: authority, retirement and conversion
Priya, Dev and Farah practise as a general partnership under a written agreement made in 2020. Clause 14 says no partner may commit the firm to a purchase over £25,000 without the written consent of all partners. In May, Dev, who handled the firm's largest supplier relationship, placed an order for £60,000 of stock with Cornhill Packaging Ltd without telling the others. Cornhill had invoiced the firm regularly for three years and had never seen the partnership agreement. In June, Dev retired. The firm placed no advertisement and told only two of its customers. In August, Cornhill, still unaware of the retirement, accepted a further £40,000 order from Dev, who signed as 'partner'. In September the firm converted to Northgate LLP, and the three former partners now want to know who is liable for what.
1. Is the firm bound by the £60,000 order placed by Dev in May?
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A partner's authority has two limbs. Actual authority is governed by the partnership agreement, and clause 14 removed Dev's authority to commit the firm to purchases above £25,000 without written consent, so actual authority is absent.
Apparent, or ostensible, authority may still bind the firm. Section 5 Partnership Act 1890 provides that an act of a partner in the ordinary course of the firm's business binds the firm and the other partners unless the partner had no authority and the third party knew of that lack of authority. Buying trading stock is plainly in the ordinary course of business, and Cornhill had no knowledge of clause 14. The Freeman & Lockyer v Buckhurst Park conditions are satisfied: a representation that Dev was a partner, made by the firm through three years of dealings, relied on by Cornhill, which altered its position by supplying the goods.
Clause 14 is therefore an internal restriction only. The firm is bound and Priya, Farah and Dev are jointly and severally liable to Cornhill for £60,000. The partners' remedy is against Dev for breach of the partnership agreement, not a defence against the supplier.
2. Who is liable for the £40,000 order that Dev took after retiring in June?
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Retirement does not automatically end a former partner's exposure. Section 36(1) Partnership Act 1890 provides that where a partner retires and the firm continues, the retired partner remains liable for debts subsequently incurred by the firm to a person who had dealings with the firm before the retirement and who had no notice of it. Cornhill had three years of prior dealings and no notice, so Dev remains jointly and severally liable for the £40,000 alongside the continuing firm.
The firm is likewise liable. By allowing Dev to continue signing as partner without telling Cornhill, it knowingly suffered itself to be represented as continuing, which engages section 14: a person who represents themselves, or knowingly suffers themselves to be represented, as a partner is liable to anyone giving credit on the faith of that representation.
Section 36(2) provides the route to protection for those without prior dealings: advertisement in the London Gazette discharges the retired partner. Telling two customers protects the firm only against those two. Advice: give actual notice to every existing counterparty and advertise, and consider a deed of indemnity from Dev.
3. What is the effect of converting to Northgate LLP on liability for these pre-conversion debts?
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Registration as an LLP creates a body corporate with legal personality separate from its members, and from that point the members' liability is limited to the capital they have agreed to contribute, subject to the clawback in section 214 of the Insolvency Act 1986 as applied to LLPs. On conversion the LLP takes over the partnership's property and its liabilities, and it is the LLP that is sued in the first instance.
What conversion does not do is extinguish the former partners' personal liability for debts already incurred without the creditor's agreement. A debt is a contractual obligation, and substituting a new debtor requires a novation; Cornhill has not agreed to release Priya, Farah or Dev. Practically, the conversion documentation usually records that the LLP assumes the liabilities, and creditor consent is often obtained, but the absence of any such agreement means the former partners remain exposed for the £60,000 and the £40,000.
If Northgate LLP later fails, former members can also be required to contribute up to the amounts they withdrew within two years before the winding up. Advise obtaining Cornhill's written release and reviewing the conversion documents before assuming the LLP structure has ring-fenced anything.