Scottish Court of Session Decisions

At advising on 11th October 1935,—

LORD PRESIDENT (Normand).—In these three actions the defenders Thomas Boag & Son and David Bruce reclaim against an interlocutor pronounced by the Lord Ordinary in each of them finding the firm and Mr Bruce, as a partner of the firm, liable to the pursuers in various sums of money. The action of Thomson & Balfour has been treated as the leading action, and the result arrived at in it will, I think, apply also to the other two actions.

[His Lordship then dealt with a point with which this report is not concerned, and proceeded]—The facts of the case have been clearly stated by the Lord Ordinary, and the reclaimers did not challenge his findings of fact but only his final conclusion from them. Counsel for the respondents, on the other hand, challenged certain of the Lord Ordinary's findings in fact, but he did not satisfy me that any of these findings were erroneous.

The circumstances out of which the cases arise are as follows. The firm of Thomas Boag & Son, joiners in Bathgate, had originally consisted of two partners, Mr Thomas Boag and Mr William Boag, his son, one of the defenders. Mr Thomas Boag died in February 1930, and thereafter Mr William Boag continued to carry on the business in the firm name. While so carrying on the business, Mr William Boag was supplied by the pursuers with timber and other materials. Messrs Thomson & Balfour in particular supplied him with timber. On 13th September 1933 Mr William Boag entered into an agreement for partnership with Mr Bruce, which will require some consideration. There after Mr William Boag and Mr Bruce carried on business as joiners under the same firm name, Thomas Boag & Son, and this new firm also obtained supplies of timber from Thomson & Balfour. At 13th September 1933 Mr William Boag was indebted to the pursuers Thomson & Balfour in the sum of £160, 16s. 11d. under a bill granted by him dated 25th July 1933. We were informed that this bill was granted for the price of goods previously supplied. This sum of £160, 16s. 11d. is part of the sum decerned for. The remainder is the price of goods supplied to William Boag between 25th July 1933 and the date of the partnership between William Boag and Mr Bruce, plus certain bank charges, and a sum of £6, 15s. 9d. for goods delivered to the partnership for which liability is admitted. Mr Bruce repudiates liability, on the ground that neither he nor the partnership is liable for the debt of his partner contracted before the partnership commenced.

The pursuers sought to support their claim by a number of allegations, all but one of which, in the opinion of the Lord Ordinary, failed. They aver that the liability for the trade debts of Mr William Boag had been expressly undertaken by the new partnership, and they founded in support of their averment on certain letters written in the firm name by Mr Boag. They also averred that Mr Bruce had himself made statements from which it was to be inferred that the firm had accepted liability, and they made a general averment that they were led by the actings of both partners to believe that the partnership had assumed this liability. Despite the able speech of Mr Thomson, who vigorously assailed the Lord Ordinary's opinion on these points, I find myself in complete agreement with the Lord Ordinary in holding that these averments were not made out.

The Lord Ordinary, however, has found, and I think it is the fact, that there were paid into the bank account of the firm in February 1934 sums collected, not only from the debtors of the firm, but also from the trade debtors of Mr Boag, and that there were paid, out of the bank account, debts due to Mr Boag's creditors as well as to the creditors of the firm. There was, in fact, no new bank account opened by the firm till 7th February 1934, and till then at least there was no distinction made in the firm's banking between Mr Boag's trade transactions and the trade transactions of the new firm. The other books of the firm are very imperfect, and it is not now possible to extricate the affairs of Mr Boag and the affairs of the firm. Even after the new account was opened some confusion persisted, although it seems to have been of less extent. The Lord Ordinary's conclusion is that the business of the firm was in fact carried on as if there had been no change of firm at all. In these circumstances he felt compelled to hold that the new firm took over the whole trading assets of Mr Boag and must be held to have also assumed responsibility for his trading debts. I should not differ from the Lord Ordinary if Mr Bruce can be held to have been a party to an agreement with Mr Boag by which Mr Boag handed over to the new firm the whole assets of the business without consideration, or for an illusory consideration, and by which the old business of Mr Boag and the new business of the firm were to be dealt with in the indiscriminate fashion which the Lord Ordinary has described.

It is a settled principle of law that, when the whole assets of a going concern are handed over to a new partnership and the business is continued on the same footing as before, the presumption is that the liabilities are taken over with the stock—Miller v. Thorburn, M'Keand v. Laird; Heddle's Executrix v. Marwick & Hourston's Trustee . The principle is that it would be inequitable to allow a trader to injure his trade creditors by assuming a partner and handling over his whole trading assets to the new partnership without liability to pay the trade debts. But this presumption must not be extended beyond the circumstances to which it properly applies. In Heddle's Executrix Lord Shand pointed out (at p. 710) that, if a partner comes into a business, paying in a large sum of capital, and the other partners merely put in their shares of a going business as their share of the capital, special circumstances might have to be proved in order to impose liability on the new partner for transactions entered into before he became a partner. If, again, the new partnership is carried on on the basis that there shall be no liability for the prior debts and no right to collect sums due to the individual partners or the old partnership in respect of prior transactions, the presumption is, I think, displaced.

The partnership agreement in the present case was a somewhat hurriedly prepared document, and it was intended that it should be superseded by a more formal deed. But, although it presents some difficulty, two things are plain. First, that Mr Bruce paid £340 which was to be treated as his share of the capital and which was to go to Mr Boag, and that in return Mr Boag's contribution was to be based on a balance-sheet of the business then carried on by him, and that that balance-sheet was to be immediately made up. There was no actual conveyance of the stock and plant of Mr Boag's business in the agreement. But in fact the stock and plant were handed over and the value of the stock in trade, plant, and goodwill was said by the pursuers' counsel to be in the neighbourhood of £700. On this basis Mr Bruce's contribution was, as the Lord Ordinary finds, the full equivalent of a half share of the capital of the firm. It has to be observed that, of the £340 to be paid by Mr Bruce, £100 had previously been advanced and £240 was paid over when the partnership was entered into. Subsequently another £50 was paid over to the co-partnery by Mr Bruce. That £50 was used to pay wages, and the £240 was in fact used to pay Mr Boag's trade creditors. There was some discussion as to the method by which the agreement relating to this transaction was to be carried out, and the parties themselves had a dispute about Mr Boag's right to use the £240 to pay his trade debts. Mr Bruce's solicitor, Mr Sandeman—who drew the agreement under protest on account of the shortness of time allowed to him—explained to the parties at the time that the £240 should be paid to the new firm and then drawn out by Mr Boag, and that there should be entries in the firm's books to show this. In these circumstances it is clear that Mr Bruce made a real and substantial contribution in cash, and the case therefore differs from those cases in which no consideration is given by incoming partners. The agreement deals expressly with Mr Boag's past transactions. It provides that he should realise the debts due to him and pay the debts due by him, and he undertook to free and relieve Mr Bruce of all liability in connexion with his past business. Mr Bruce, on the other hand, agreed to have no claim on book debts due to Mr Boag. It was argued that the obligation to free and relieve implies that the new partnership was to come under liability, and that all that Mr Bruce had was a personal undertaking from Mr Boag to relieve him of that liability. I cannot so construe the deed. It may be that the words founded on by the pursuers are superfluous or inept, but it is not a fair construction to read into them a liability which could scarcely be assumed when the new partnership was not to be entitled to collect the debts due to Mr Boag. I agree with the Lord Ordinary's view of the contract, and with his opinion that, if the agreement had been carried out, the new firm could not have been liable for Mr Boag's debts.

But then the agreement was not carried out. No balance-sheet of Mr Boag's business was made out, and the affairs of Mr Boag's business and the new partnership business became inextricably confused—a confusion which might have been avoided if at once new books, separate from the old books of Mr Boag's business, had been opened and a new bank account begun, as Mr Bruce's solicitor had advised. The real question is whether Mr Bruce shares his partner's responsibility for this course of conduct or not. If he does, it may well be that the written agreement must be taken as superseded by a new agreement to be deduced or implied from the actings of the partners, and that one term of this implied agreement might be that the partnership should be liable for Mr Boag's debts. The keeping of the books and the correspondence was delegated to Mr Boag. Mr Bruce is a practical joiner and not familiar with the commercial side of such a partnership. The whole effective duration of the partnership was brief, for a judicial factor was appointed in June 1934, and the period before the question of Mr Bruce's liability was effectively raised extends only to March 1934. Mr Boag says that he meant the business to carry on for possibly a year as if nothing had happened, and it was on that footing I suppose that he dealt with his affairs. But his conduct was inconsistent with the partnership agreement which he had subscribed, and he could not bind Mr Bruce to any modification of that agreement without Mr Bruce's consent. From the evidence of Mr Bruce it appears that he continually protested against Mr Boag's failure to open a new bank account. He trusted Mr Boag to use partnership money only for partnership purposes. He objected to Mr Boag's using the £240 provided by him for the purpose of paying the debts due by Mr Boag and without crediting the partnership with it. He consulted his solicitor in February about Mr Boag's paying his old accounts with the firm's funds, and after that consultation Mr Sandeman wrote to Mr Boag and protested. About the same time, and in order to prevent further irregularities, it was arranged that a new bank account should at last be opened and that thenceforth cheques should be signed by both partners. There were apparently some cheques signed after that by both parties by which payment was made to Mr Boag's trade creditors, but Mr Bruce says he did not understand that at the time, and he appears to have acted under some deception. Mr Bruce's account of his relations with Mr Boag is to some extent corroborated by Mr Sandeman, but in some respects it is contradicted by Mr Boag. I am not, however, prepared to accept Mr Boag's evidence when it is in conflict with Mr Bruce's. But it is for the pursuers to prove that the written agreement was departed from with Mr Bruce's consent, and in my opinion they have failed. It is impossible to spell out of Mr Bruce's protests and his dissatisfaction with Mr Boag's conduct an assent to a modification of the written agreement. So far as he was concerned the written agreement remained in force, and any departure from it was contrary to his wishes and against his protests. When Mr Bruce learned in March 1934 that a claim was being made against him by Messrs Thomson & Balfour he went to see Mr Thomson, who advised him to consult his solicitor, and after he had done so the claim was repudiated. It remains to be noticed that, while no proper intimation was sent out that a new partnership had been formed, Mr Grant, the representative of Thomson & Balfour, was aware of the intention that Mr Bruce should become a partner with Mr Boag in August 1933, and he knew in September that the partnership had actually been formed. The pursuers Walkingshaw & Co. were informed before November 1933 of the existence of the new co-partnery, and no special point was made by either side of the fact that, until they were informed, Messrs Walkingshaw, no doubt, believed that the business was being carried on as formerly by Mr Boag alone and presumably looked to Mr Boag alone for payment.

For these reasons I am for recalling the Lord Ordinary's interlocutor, and—except to the extent of £6, 15s. 9d., the admitted liability in the case of Thomson & Balfour—assoilzieing the defenders. The result may be that both Mr Bruce and Mr Boag's creditors have suffered from Mr Boag's method of keeping the books and mixing together the affairs of his own creditors with those of the new company, but I am unable to find any legal ground of liability against Mr Bruce. [His Lordship then dealt with another question with which this report is not concerned.]

LORD BLACKBURN .—I am of the same opinion, and for much the same reasons as your Lordship has stated. The case was very well argued before us by both sides, but the authorities to which we were referred do not appear to me to have any direct bearing on the question at issue in the present case. The cases all dealt with the assumption of a new partner into an existing firm who did not bring in any contribution towards the capital of the firm, and in such cases the presumption is that the incoming partner undertakes liability for the debts of the existing firm.

In the present case Mr Bruce, in his partnership agreement with Mr Boag, agreed to bring in a certain amount of capital, and in such cases the presumption does not arise. In Heddle's Executrix Lord Shand refers (at p. 710) to this distinction, where he says that the circumstances would be entirely different in the case where a new partner brings in a large contribution to the capital of the existing firm, and that in such a case it would require very special circumstances indeed to establish the liability of the new partner for the debts contracted by the firm prior to his entry thereto. The meaning of the word "large" as used by Lord Shand must depend upon the circumstances of each case.

In this case Mr Bruce brought in as a new partner a contribution of £390. That is not a large sum in one sense of the word, but, relatively to the amount of capital employed in the business and to the means of Mr Bruce, the £390 may, in my opinion, be regarded undoubtedly as a large contribution. The business of a joiner carrying on funeral work cannot require a large amount of capital. And we know from Mr Bruce's evidence that his contribution of £390 was made up by £150, which represented his savings in the bank, and by £240, which was advanced to him by his father-in-law to enable him to become a partner in the new business. Treating that as a large contribution and therefore bringing the case exactly under the exception which Lord Shand referred to in his judgment, I think the onus is on the pursuers to show some special circumstances to establish that Mr Bruce intended to take the liabilities of the old firm on his own shoulders. So far from their succeeding in establishing that, it is proved, I think conclusively, (and it has been so held by the Lord Ordinary) that Mr Bruce expressly provided in the agreement which he entered into with Mr Boag that he should not assume any such liability, and accordingly, in my opinion, the pursuers have entirely failed to establish any such special circumstances as would entitle them to succeed in this action.

I agree with what the Lord Ordinary has said as to the facts which he has found proved, and with the conclusion which he reaches at the end of the passage in which he deals with these facts, that it was expressly agreed that Mr Bruce should not assume any liability for the debts of the old firm; but I am quite unable to follow the latter part of his judgment where he holds that, because the management of the funds of the new firm was allowed to get into such a state of confusion as to make it difficult to disentangle the belongings of the new firm and the belongings of the old, therefore it must be held that Mr Bruce had assumed responsibility for the debts of the old firm. The confusion was entirely due to the manipulation by Mr Boag of the finances of the firm, and I can see no justification for any such assumption as the Lord Ordinary has made to the effect that Mr Bruce, as a result of Mr Boag's manipulation of the funds, had undertaken liability for the debts due by Mr Boag prior to the formation of the new firm. The debt sued for is a debt which in part is a debt for services rendered to the old firm and in part is a debt due by the new firm. The part that is due by the new firm Mr Bruce is prepared to pay, and has offered to pay; but the part that represents the debt due by the old firm he declines to pay, and I can see no justification for holding that he is bound to undertake liability for this debt. Accordingly, I am of opinion that he should be absolved from the conclusions of the action and that the reclaiming motion should be granted.

LORD MORISON .—Prior to September 1933 the pursuers had sold and delivered to William Boag—then a sole partner carrying on business as Thomas Boag & Son—certain goods to the value of about £362. They frequently asked Boag to pay the amount of their account but they failed to recover it. At that time the defender Bruce was merely the foreman in Boag's business, and was under no liability for this debt.

On or about 13th September Boag was in financial difficulties and desired to raise money to pay his creditors. He approached Bruce and asked him to advance him money for the purpose, on the footing that a co-partnery was to be entered into as at 13th September in terms of the agreement. It is quite clear from the terms of this document that Mr Bruce did not become liable for the pursuers' debt, or indeed for any of Boag's debts. It is a term of the contract that Boag "will .... settle the debts due by him in connexion with his present business and undertake to free and relieve the said David Bruce of all liability in connexion therewith." There is no conveyance of Boag's business and assets to the new co-partnery. It was contemplated that a balance-sheet should be made up before this was done.

The pursuers' account here was one of the debts covered by Boag's obligation. It is, of course, obvious that Boag could not impose any liability for the pursuers debts upon Bruce, either as his partner or as an individual, without his consent. It is not alleged that this was either done or attempted. The argument, if I understand it correctly, was that the pursuers were entitled to hold Bruce liable, because he had taken over Boag's assets and had been a party to Boag's paying certain of his own creditors with money which was intended for the new co-partnery. The argument was supported by reference to the law laid down in the case of Heddle. I think the pursuers contentions are negatived by the facts, and that the case of Heddle has no application to this case. I need say no more on this point than that I agree with the exposition of the law on the subject given by the learned Lord Ordinary.

Here the defender Bruce, in terms of the minute, agreed to pay a certain sum as capital for the new co-partnery, but he made no stipulation that he was, at that stage, to take over Boag's assets in his business or any portion of them.

It is true that Boag paid certain of his creditors from money intended as capital for the new co-partnery. He also mixed up his own business affairs and liabilities with those of the new co-partnery; and he made irregular entries in the co-partnery books in this connexion. These proceedings not only took place without Bruce's knowledge or authority, but, when he got to know the situation, he protested against Boag's conduct and consulted his law agent on the subject. Besides, I do not follow the argument that, because Boag had paid certain of his creditors with the new firm's money, therefore the pursuers are entitled to get their debt constituted as against Bruce. I think it is very plain on the evidence that the defender Bruce at no time assumed liability for the pursuers debt, and throughout contracted with Boag on the footing that the pursuers claim was a claim only against him. The defender Bruce at no time received any of Boag's assets, and I venture to doubt whether there were any free assets to be received.

LORD FLEMING .—The general rule is that, when a new firm is constituted by a person becoming a partner in an existing business, the firm is not liable for the debts of the old business. Moreover, in the present case there was an agreement between the partners which, as I read it, provided that the debts of the old business were to be paid by Mr Boag and that neither the firm nor Mr Bruce was to be under any liability therefor. Notwithstanding this agreement the firm might subsequently have assumed liability for these debts. It might have so acted or dealt with the creditors of the old business as to show that it accepted liability for them. But it was for the pursuers to prove this, and they have failed to do so.

The pursuers appeared to me to have been faced with two serious difficulties which they were unable to overcome. First, the statements and actings on which they founded were at best of ambiguous import; and, second, they had to rely in many instances upon statements and actings of Mr Boag. It seems clear, however, that it is outwith the scope of the ordinary mandate of a partner to impose liability on the firm for debts due by himself as an individual. But the pursuers, in addition, also relied on a number of decided cases, of which M'Keand v. Laird may be regarded as typical. The ground of decision in these cases was that the whole assets of a business had been transferred to a new firm without consideration given therefore, without provision being made for liquidation of the liabilities, and without any capital being provided by the incoming partner, and that the business continued to be carried on on the same lines. It was held, in such circumstances, that the new firm must be deemed to have accepted liability for the debts of the old business.

These cases are distinguishable from the present in several important respects. Here the whole assets were not taken over by the firm, the accounts due to the old business being taken over by Mr Boag. Provision was also made under which Mr Boag was taken bound to pay the debts due by it. And, whatever view be taken of the true character of the payment made by Mr Bruce, Mr Boag received consideration for the stock transferred by him, and capital in the new firm was provided by Mr Bruce. It was, however, said by the respondents' counsel that the written agreement was disregarded by the parties, and that, notwithstanding its terms, the business was carried on in such a way as to show that the firm was in reality accepting liability for all the old debts. There appears to be no doubt that Mr Boag, who conducted the financial side of the business, did not entirely comply with the provisions of the agreement. But Mr Bruce seems all along to have protested against this, and to have taken up the attitude that the money belonging to the firm should be applied in discharging the firm's liabilities. The proof does not, in my opinion, establish facts and circumstances in connexion with the carrying on of the business known to, and approved of by, Mr Bruce, from which it could be inferred that the firm had assumed universal liability for the debts of the old business, and in particular for the debts due to the pursuers. I am accordingly of opinion that the claims made by the pursuers in these actions fail.