Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 115
CA56/10	OPINION OF LORD HODGE in the cause WILLIAM JOHN SIM Pursuer; against DAVID JOHN HOWAT and BRIDGET MARY McLAREN Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuer: Logan; Campbell Smith WS

Defenders: Wallace; Morisons and HBM Sayers

5 July 2011

[1] The pursuer ("Mr Sim") and the defenders ("Mr Howat" and "Ms McLaren") practised law as partners of the firm of Pattison & Sim, solicitors. A dispute has arisen out of an agreement which the parties entered into in about October 2005 when Mr Sim proposed to retire from the partnership. The agreement provided for payment to Mr Sim of £175,000 in monthly instalments of £2,916.66 to purchase his capital and interest in the firm. The defenders initially paid the instalments but on becoming aware of a potential liability of the firm to the Scottish Solicitors' Staff Pension Fund ("SSSPF") they have withheld further payment. This action, in which Mr Sim seeks declarator of the existence of the agreement and payment of certain sums, has resulted.

[2] In an attempt to determine the dispute in an economic way, the parties agreed (a) to enter into a substantial Joint Minute of Admissions, (b) each to produce evidence in the form of an affidavit and (c) to debate the issue of who was liable to the SSSPF for the periods 2001-2005 and from 2005 onwards. From the agreed information as to the constitution of the partnerships, which was made available at the debate, it became clear that the references to 2001-2005 and 2005 onwards should have been 1999-2006 and 2006 onwards. I proceed on that basis in this opinion.

Factual Background

[3] The firm of Pattison & Sim employed Mr Ronald Barr between 1970 and 1998. He was a member of the SSSPF between 1974 and January 1998 when he ceased to be employed. The various partnerships which traded under the firm name of Pattison & Sim contributed to the SSSPF throughout that period. Pattison & Sim made no further payments after Mr Barr's departure until Mr Sim responded to a request by the SSSPF by paying it £1,416 on a partnership cheque in December 2004.

[4] Mr Sim was assumed as a partner in Pattison & Sim on 1 January 1972. At that time the partnership included Mr Sim's father, his uncle and Mr Archibald Crawford. The parties have agreed in 7/11 of process the composition of the various partnerships from 1972 to date. I summarise only the relevant matters. Mr Sim's father and uncle retired from the partnership in 1979 and 1983 respectively and thereafter the partnership paid them annuities. Mr Howat was assumed as a salaried partner on 1 June 1991. Between 1995 and 1999 the firm comprised Mr Sim and Mr Howat. Ms McLaren was assumed as a salaried partner in 1999 and became an equity partner in 2002. She paid £20,000 into the partnership as capital in 2000 in compliance with an agreement which she entered into in 1999 when she became a partner. The partnership's accounts to 31 May 1999, which Mr Sim and Mr Howat agreed in 2000, which valued at cost the principal assets, namely land and buildings, fixtures and fittings and motor vehicles, showed the net assets of the partnership at that date at £258,417. Ms McLaren refused to contribute to the annuities of Mr Sim's father and uncle and thereafter, when Mr Howat also declined to contribute, Mr Sim alone of the three paid those annuities out of his share of the partnership profits.

[5] Between 1 June 1999 and 31 May 2006 Mr Sim, Mr Howat and Ms McLaren practised in partnership without a formal partnership agreement. From 2002 to 31 May 2006 each partner received an equal share of the profits.

[6] When Mr Sim proposed to retire in 2005 the parties entered into negotiations with the intention that Mr Howat and Ms McLaren would acquire Mr Sim's interest in Pattison & Sim and continue to practise under that name. They had lengthy discussions concerning his capital account. It was the practice of the various partnerships known as Pattison & Sim, whenever possible, to assume and retire partners at the end of the partnership's financial year so that the year-end accounts became the final accounts of the former partnership. Those accounts formed the basis of the discussions between the outgoing partners and the continuing partners and various adjustments were made. Mr Sim took advice from Mr Bob Dallas, an accountant and Mr Howat and Ms McLaren consulted Mr Jim Hamilton, who also was an accountant. It was agreed that Mr Howat and Ms McLaren would purchase Mr Sim's interest in the partnership for £175,000 and that that sum would be paid over five years by sixty monthly instalments of £2,916.66. The parties did not prepare or sign a formal agreement. Since 1 June 2006, Mr Howat and Ms McLaren have practised in partnership under the firm name of Pattison & Sim.

[7] The parties thereafter agreed several variations of the agreement by which £3,892.94 was deducted from the sum payable to Mr Sim. Mr Howat and Ms McLaren paid the agreed monthly instalments to Mr Sim together with interest until December 2008. They have made no payment since then. A claim was intimated to them on behalf of the SSSPF for contributions in respect of Mr Barr's final salary pension. Mr Sim acknowledged that the potential liability to the SSSPF had not been discussed or disclosed in the negotiation of his retirement package. He accepted that, if the partnership which existed between 1999 and 2006 were liable for further payments to the SSSPF, he would remain liable for one-third of the sums due, because he had undertaken in the agreement governing his withdrawal from the firm to remain liable for his share of any liabilities of that partnership which were not accounted for in the partnership accounts to 31 May 2006. While Mr Sim's counsel confirmed his acceptance of this liability, it was not agreed in the Joint Minute.

The SSSPF

[8] The SSSPF was established by trust deed in 1947 and the rules which govern it have been replaced in 1980 and 1990 and amended thereafter by subsequent deeds. While Mr Sim's agents have produced certain of the relevant documents and the 1947 rules are referred to in the Joint Minute, I was not given the current rules and must therefore qualify what I say about particular rules by a recognition that they may have been altered by the time Pattison & Sim ceased to employ Mr Barr. Under rule III of the 1947 scheme an "assenting employer" was one who made membership of the fund a condition of employment to all of its full time employees. I am informed that by 1999 Pattison & Sim was not an "assenting employer". Rule XVIII provided that employers could terminate their obligations to the fund at any time on giving six months' notice. It was not suggested that any of the partnerships which had constituted Pattison & Sim over the years had given such notice of termination.

The contentions of the parties

[9] It is necessary to understand the background to the parties' contentions as otherwise they might appear to be contrary to their interests. The defenders' contention is that Mr Sim misrepresented the financial state of the partnership in 2005 when the terms of his retirement were negotiated by failing to disclose that the partnership which existed at that time had a continuing liability to the SSSPF. The defenders seek to have the agreement, under which Mr Sim makes his claims in this action, reduced ope exceptionis by reason of that alleged misrepresentation. Thus it is Mr Sim's position that the liability to the SSSPF did not transfer to the new partnership which came into being in 1999 when Ms McLaren was assumed a partner and it is the defenders' contention that it did.

[10] The parties' submissions focused on the line of authority in Scots law which provides as a principle or presumption that where a new partnership takes over the assets of a prior business and maintains that business as a going concern without giving value therefor, it is held to have taken over the earlier business's liabilities as well. I was referred to Miller v Thorburn (1861) 23D 359, McKeand v Laird (1861) 23D 846, Heddle's Executrix v Marwick & Hourston's Trustee (1888) 15 R 698, Thomson & Balfour v Boag & Son 1936 SC 2, Miller v McLeod 1973 SC 172 and Ocra (Isle of Man) Ltd v Anite Scotland Ltd 2003 SLT 1232. In relation to the different approach in English law I was referred to Creasey v Breachwood Motors Ltd [1992] BCC 638.

[11] Mr Logan for Mr Sim submitted that the liability to the SSSPF had not transferred from the partnership of which Mr Sim and Mr Howat were the partners to the new partnership created in 1999 when Ms McLaren was assumed as a partner. At that time none of the parties was aware of any continuing liability to the SSSPF. That liability was contingent. No allowance for any such liability was included in the partnership's balance sheet. Further, Ms McLaren had introduced as her capital the not insignificant sum of £20,000 as a condition of her assumption as a partner. While she initially received a fixed salary, she would have been entitled, if the partnership had been dissolved, to both the return of her capital and a share in the surplus assets based on her salary as a proportion of the profits. After 2002 she was entitled to one-third of any surplus. She and the new partnership derived no benefit from Mr Barr's services as he had ceased to be employed by Pattison & Sim before she joined the partnership.

[12] Mr Wallace for the defenders submitted that the liability to the SSSPF was taken on by the new partnership created in 1999. At that time Pattison & Sim would have incurred a liability if they had chosen to withdraw from the SSSPF and they also had a contingent liability to contribute to any deficit in that fund. Ms McLaren's payment of £20,000 as capital did not purchase anything. She was not entitled to share in the surplus assets of the partnership until she became an equity partner in 2002. Her payment was simply following the established practice in Pattison & Sim that an incoming partner contributed £20,000 as capital on assumption. That sum was credited to her account in the firm. In any event it was not a substantial sum. Following her assumption as a partner, Pattison & Sim continued its business as before. The new partnership paid the debts which the old partnership had incurred. That practice included Mr Sim's payment of £1,416 to the SSSPF in 2004. It was not relevant that the liability to the SSSPF was unknown in 1999 or thereafter; it existed and was transferred to a new partnership in 1999 and again in 2006.

Discussion

(i) The relevant law

[13] The contract which the SSSPF had with Pattison & Sim was ultimately with the partnership which came to an end on the assumption of Ms McLaren in 1999. Mr Logan and Mr Wallace agreed that, in both English law and Scots law, a change in the membership of a partnership created a new partnership: Hadlee v Commissioner of Inland Revenue
[1989] 2 NZLR 447, Eichelbaum CJ at p.455; Inland Revenue Commissioners v Gibbs
[1942] AC 402. In Scots law that new partnership was a separate legal person from the former partnership: Inland Revenue v Graham's Trustee 1971 SC (HL) 1, Lord Hunter at pp.4-5, Lord Reid at pp.19-20 and Lord Upjohn at pp.26-27. See also Jardine Paterson v Fraser 1974 SLT 93. The general rule governing the liability of a new partner is set out in section 17 of the codifying Partnership Act 1890, in words which do not fully recognise that effect of the change in membership:

"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 done before he became a partner."

Lord Fleming summarised the law in the context of Scots law in Thomson & Balfour v Boag & Son (at p.15) in these terms:

"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."

Other things being equal, therefore, the post-1999 partnership would not have been liable to the SSSPF.

[14] In English law Mr Sim and Mr Howat as the former partners of the pre-1999 partnership would alone be liable unless Ms McLaren had agreed to accept liability for debts incurred before her assumption as a partner. It seems that there is no presumption that where the whole business of a partnership is taken over by a different partnership without payment therefor, liabilities are transferred as well as assets: Creasey v Breachwood Motors Ltd, Deputy High Court Judge Richard Southwell QC at pp.643-645.

[15] Scots law is not the same; it has historically had a presumption that the gratuitous transfer of the assets of a business from a sole trader or a partnership to another partnership entails the recipient of the assets assuming liability for the prior debts of the business. But certain circumstances must exist for the presumption to arise. Thus where the recipient has paid value for the assets the presumption does not arise. Further, in cases where there is a partnership contract which states that the new partnership is not liable for the debts of the old partnership and the reality of the transaction is consistent with that stipulation, one must find an express undertaking by the new partnership to a creditor of the old firm or dealings with him from which one can infer an undertaking of liability to him: Stephen's Trustee v Macdougall & Co's Trustee (1889) 16 R 779. While that is clear, it does not assist in circumstances such as this where there is no written or express oral agreement as to liability for pre-existing debts of the transferred business.

[16] The Law Commission and the Scottish Law Commission in their Joint Consultation Paper on Partnership Law (2000) (at paragraph 10.65) summarised the various cases which dealt with the latter circumstances in this way:

"From the case law, it seems that the courts in Scotland have focused on the circumstances surrounding the creation of the new partnership and the transfer of the assets of the former business to it, in deciding on the liability of the new partnership for the old firm's debts. Where the business taken over is substantially the same as the old firm, and where that business is continued without interruption, there appears to be a general presumption that the new partnership takes over the whole liabilities a well as the assets. This presumption may be displaced. The principle behind this presumption is that creditors should not be prevented from recovering a debt because all the assets of the firm which was liable have been taken over by a new partnership which is substantially similar, in terms of business and constitution, to the old firm. While judges speak of applying a presumption, the courts in reality are deciding whether the new firm has agreed to assume the liabilities of the old firm. Such an agreement may be inferred from circumstances of the particular case or from a course of dealing."

[17] That general summary, although helpful as an overview, gives little assistance in deciding a particular case. It is necessary therefore to examine the Scottish case law in more detail to ascertain how to apply that approach in this case.

[18] In McKeand v Laird a draper (Mr Laird) took two of his employees into partnership with him, giving them a minority stake in the business, which had stock worth about £9,000. When he was a sole trader he had incurred debts to, among others, Mr McKeand. In the partnership contract Mr Laird undertook to contribute £600 of capital. The contract had no express provision for the takeover of the earlier trading liabilities of the business. But Mr Laird did not have to provide cash as his capital contribution because his valuation of the business showed its net assets as £687. Of that sum, £600 was treated as Mr Laird's capital contribution and the partnership agreement provided that he was a creditor of the firm as regards any excess over his agreed capital contribution. The business did not prosper and the estate of the partnership was sequestrated. In the statement of the partnership's affairs, which the partners gave on oath in the sequestration, they listed Mr McKeand's debt as a debt due by the firm; but the trustee in sequestration rejected his claim on the basis that the partnership contract did not bind the firm to pay Mr Laird's pre-existing trade debts. A majority of the First Division and consulted judges of the Second Division, in a seven-judge case, held that the partnership agreement was not conclusive evidence of the nature of the transaction but that the court should look at the wider circumstances of the case. On that evidence the partnership had taken over a going concern and had taken both the stock and the liabilities of that business.

[19] In Miller v Thorburn a father, who had carried on a jeweller's business as a sole trader, assumed his son as a partner and the new partnership took over the assets of the business as a going concern and traded from the same premises. The son brought no capital into the business but had some relevant skill and experience. The partnership paid trading debts which the father had already incurred as they fell due. The Second Division held that the partnership had taken over the father's pre-existing trading liabilities as well as his trading assets. Thus a cautioner on a bond of cash-credit, which the father had granted as a sole trader, was entitled to rank in the insolvency of the partnership. In that case the partnership contract had a provision to protect the interests of the father's creditors, but the court, following McKeand, decided the case as a matter of general principle.

[20] The First Division revisited the issue in Heddle's Executrix v Marwick & Hourston's Trustee. In that case Mrs Marwick, the widow of an ironmonger and general merchant, continued his business for several years and then took into partnership with her Mr Hourston, the manager of the business whom she had employed after her husband's death. The partnership took over the assets and goodwill of the business and neither partner put any new capital into the firm. The parties did not execute a partnership contract but agreed that Mr Hourston would receive one-third of the profits. The partnership traded and paid off most of the prior debts of the business. Mr Heddle was a creditor of Mrs Marwick, having advanced a substantial sum of money to her business when she was a sole trader. That debt was not repaid. Several years later the partnership's business failed and its estates were sequestrated. The Lord Ordinary, Lord Trayner, held that Mr Heddle could rank on the estates of the partnership. Among other things he observed (at p.701) that because the partnership had taken over the debts of the continuing business, Mr Hourston's ignorance of the debt due to Mr Heddle gave him no exemption from liability. Further, he held that the partnership had acknowledged the debt when the partners prepared a statement of affairs on entering into a trust deed for its creditors. The First Division adhered to his interlocutor. Both Lord Adam and Lord Shand stated (at pp. 707 and 709 respectively) that it was a question of circumstances whether it could be established that the new partnership had agreed to adopt old debts and be liable for them. Lord Shand inferred that Mr Hourston must have known of the debt to Mr Heddle, even if he did not know its amount. Lord Adam asked the question: "what is the true nature of the transaction?" He also founded on McKeand and Miller, holding that, in order not to injure prior creditors, there was a general presumption that when a partnership takes over the whole estate of a business and continues the business on the same footing, it takes on the business's liabilities as well as its assets. The Lord President, Lord Inglis, concurred with Lord Adam's view of those two cases.

[21] In Stephen's Trustee v Macdougall & Co's Trustee, which I mentioned in paragraph [15] above, S lent money to a partnership of A and B, who traded as drapers, to enable it to rebuild a warehouse and a house for a manager. S took a heritable security over the site which was an asset of that partnership. Three years later, A and B took on a new partner, C, entering into a formal partnership contract. That contract provided that C was to contribute capital to the partnership, that the stock was acquired at value, and that the new partnership had no concern for the debts of the old firm. The heritable subjects were not transferred to the new partnership, which was to pay a rent for occupying them. The new partnership was liable to pay the old partnership for the stock, furniture and fittings which it took over. Separate sets of books and separate bank accounts were kept for the old and new partnerships. S's executrix claimed for the balance of S's loan in the sequestration of the new partnership but the First Division rejected her claim. In delivering the leading opinion Lord Shand attached importance to the nature of the debt, being a long-term loan secured over the property, the development of which it financed. He opined that such a loan was not the class of debt for which it was probable that the new partnership would take on the liability. The heritable property remained in the ownership of the old partnership. The contract of partnership clearly distinguished the two businesses and the new partnership carried out its stipulations. In the circumstances the new partnership would have been liable only if it had made a direct undertaking to S in writing or by unequivocal dealings with S. The failure to intimate the creation of the new partnership to S did not make the new partnership his debtor.

[22] In Thomson & Balfour v Boag & Son a joiner (A) who had been a sole trader entered into partnership with his foreman (B). They entered into a deed of partnership which provided (i) that a balance sheet of the new partnership be prepared, (ii) that each party would share profits equally, (iii) that B would pay £340 which would be treated as part of his capital, and (iv) that A would receive the debts due to him and pay the debts due by his prior business, relieving B of all liability for them. Thereafter the partnership took over A's business premises and stock in trade. B's contribution of £340 was approximately one half of the value of the assets of the business. A used the £340 to pay creditors of his old business but, despite protests from B and his solicitor, failed to prepare a balance sheet, delayed in opening a new bank account, and failed in the firm's accounts to distinguish between money due to the old business and the partnership business. B provided a further £50 of capital to enable the partnership to pay wages. The First Division distinguished Heddle's Executrix, holding that a partnership had not taken on the debts of A's prior business. The Lord President, Lord Normand, at p.10 summarised the law in these terms:

"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, McKeand 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 handing over his whole trading assets to the new partnership without liability to pay the trade debts. But the 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 a large sum of capital, and the others 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 terms upon which B entered the partnership were clear; and A's failure to keep the books in a way which implemented their agreement, a course of action to which B had not consented, did not in the circumstances give rise to the inference that the partnership had accepted responsibility to meet A's prior trade debts.

[23] The Second Division in Miller v MacLeod addressed a question whether the transfer of work in progress from a sole practitioner to a partnership, and from the surviving partner of that partnership to another partnership, gave rise to a liability on the part of the latter to account for the prior acts of the sole practitioner. In that case a solicitor, A, who practised on his own account, undertook the winding up of an executry. As a result of his ill health, his books and records were disordered. He entered into partnership with B, who was aware of the state of A's business records. The partnership of A and B took over the assets and goodwill of A's business and continued the winding up the executry. Shortly thereafter, A died. B carried on business on his own account for two years and then assumed C as a partner. The new partnership carried on business as before, including the winding up of the executry. No capital was invested in the business by the incoming partner on the creation of either partnership. The pursuer sought an accounting from the partnership of B and C for the intromissions in the executry, including A's intromissions in the period up to his death. The issue for the Second Division was whether the partnership of B and C had to account for the period before the creation of the partnership of A and B. The court inferred from the circumstances that the partnership of B and C had accepted the liabilities of the business and had to account for A's intromissions, including those before the creation of the partnership of A and B. In that case both Lord Justice-Clerk Wheatley and Lord Kissen approved the line of authority and the summary of the law by Lord Normand in Thomson & Balfour and applied them to a solicitor's business.

[24] Finally, in Ocra (Isle of Man) Ltd v Anite Scotland Ltd Lord Eassie considered this line of authority in the context of the sale of the assets of one company to another. Ocra, relying on those authorities, made an ambitious claim that a company, A, was liable jointly and severally with another company, B, for B's alleged breach of contract and breach of delictual duties. It argued, unsuccessfully, that the fact that the business assets and goodwill had been acquired for valuable consideration was immaterial if the business was carried on "on the same footing." The relevant facts were that B sold its business assets to A in an asset purchase agreement for £1,350,000. A assumed the benefit of B's contracts and undertook to indemnify B against liabilities incurred in respect of them. Each party undertook to use all reasonable endeavours to obtain third party consent to the assignation or novation of those contracts and A agreed to act as subcontractor of B pending the completion of such arrangements. Where third party consent could not be obtained, B agreed to perform its obligations in accordance with A's instructions and to hold the benefit of the contract in trust for A. Unsurprisingly, Lord Eassie rejected the pursuer's contention, stating:

"It is, in my view, evident that any presumption in favour of an assumption of liability for the debts of the "transferred" business (as applied in Heddle's Exx, and its predecessors) arises only where the original trading entity passes its business to a technically new trading entity gratuitously and without any outward change in the form or way in which the business is carried on. In this context, characterisation as gratuitous is of course not avoided by the existence of some wholly insubstantial or token consideration."

[25] All but the last of the cases in this line of authority to which I have referred are binding on me as Inner House authority and the last case, being the decision of an experienced commercial judge, is highly persuasive. Where do those authorities leave the law?

[26] In my opinion, in order to understand the scope of the Scots law approach to the transfer of business assets between partnerships and in particular the significance of a capital contribution by the incoming partner, it is helpful to consider the mischief which it seeks to address.

[27] In the discussion which follows I refer to the original trader who transfers his business or the original partnership which ceases to exist on a change of membership as A. B is the new partnership which comes into being on the transfer or on the change of membership; C is the incoming partner whose assumption as a partner creates B; and D is the creditor of the original trader or the original partnership, A.

[28] The mischief which is addressed is the prejudice to the creditor, D, when A's business assets are transferred to the new partnership B. D can still sue A (or the former partners of the now dissolved firm, A) for his debt but he would have no direct claim against B's assets. A's interest in the partnership, B, would be available to satisfy D's claim. But A's interest in the winding up of B would rank after B's creditors: see the default rule in section 44 of the Partnership Act 1890. Thus the new, post-transfer creditors of the business would have priority over D. The mischief would not arise if B gives value to A for the assets which A transfers to it. The purchase price would be available in A's hands to satisfy D: see also Henderson v Stubbs' Ltd (1894) 22 R 51, Lord Adam at p.55. If B purchased the assets at an undervalue, D would have a remedy under section 34 of the Bankruptcy (Scotland) Act 1985 to undo a gratuitous alienation if A became insolvent within the time limits set out in that section. But that may not be the only remedy. The mischief arises where B does not give value for A's assets. But the scope of the mischief and the scope of the presumption are not, in my view, the same.

[29] It appears to me that, in both Scots law and English law, where D is able to enforce his claim against the new partnership B, both B and the new partner C must have accepted liability either expressly or tacitly to meet his claim. Whether there is such acceptance will depend on the facts and circumstances of each case and also the law of obligations in each legal system. As I have said, English law does not appear to have the presumption to which the Scots cases refer. In Scots law it seems to me that the court may conclude that B has accepted liability even where the circumstances do not give rise to the presumption which judges have discussed in the case law set out above.

[30] It is less common nowadays for the court to speak of presumptions when it analyses facts and circumstances to see if an inference can properly be made. Now we would tend to ask whether the facts give rise to the inference that B and C assumed liability to meet D's claim. But I am content to use the language of presumption.

[31] The presumption does not arise unless there are facts and circumstances which bring it into play. The continuation of substantially the same business without interruption is necessary for the presumption. But the presumption does not apply when B gives value for A's assets by purchase, as in Stephen's Trustee. Where the new partner, C, has made a substantial capital contribution, that may be a factor which would tend to displace the presumption. But the payment of capital is not the same as payment of a purchase price. C's capital is available to the new partnership, B, and it becomes a debt due by B to C. It is not necessarily available to A. If it is not, the transfer of assets from A to B may be gratuitous in the sense in which Lord Eassie used the word in Ocra (Isle of Man) Ltd. But circumstances may arise where it is intended that C's capital will be used to pay off A's trade creditors, as in Thomson & Balfour. That would tend to negative any inference of an assumption by B and C of liability for A's debts.

[32] Various other factors are relevant depending on the circumstances of the particular case. The court looks to whether there were significant outward changes in the business on its transfer from A to B. It looks at the subsequent behaviour of A and B: whether they kept separate accounts for the winding up of A's business and for the continuance of B's business respectively. It considers the nature of the debt as in Stephen's Trustee. It looks to see whether B paid some of the prior debts of the business for which A was responsible. It takes into account whether B and C have recognised their liability to pay D, as in McKeand v Laird. It has held that C's lack of knowledge of the extent of A's liabilities or of D's claim is not an answer to D's assertion that B has undertaken liability to pay that debt: Heddle's Exx, Lord Trayner at p.701; Miller v Macleod, Lord Justice-Clerk Wheatley at p.181 and Lord Kissen at p.187. The terms of the partnership deed, if any, are a relevant consideration but are not determinative if the reality of the transaction is otherwise: Thomson & Balfour.

[33] The case law is not explicit as to the legal mechanism by which the new partnership, B, without any involvement by D, assumes responsibility for A's debts. A cannot transfer his obligations to B without the consent of the creditor, D. One can assign certain rights without the consent of the debtor; but one cannot transfer obligations without the creditor's consent. Otherwise one could rid oneself of very onerous obligations by transferring them to a man of straw, just as Keawe got rid of the damning bottle to the drunken boatswain in R. L. Stevenson's South Sea Tale, "The Bottle Imp". I think that the effect of the transaction in cases where B has been held to have assumed the liability for D's claim is that A remains liable but B is treated as having made a binding unilateral undertaking to pay the debt due to D. In other words, D can sue B as well as or instead of A. It may be that the historic inability of the English law of contract to enforce such a unilateral promise is, in part at least, an explanation for the differing approach to the issue in the two jurisdictions. The idea of a binding unilateral undertaking is also consistent with the continuing liability of the former partners of the dissolved partnership: see Lujo Properties Ltd v Green 1997 SLT 225, Lord Penrose at pp.236-237.

(ii) The application of the law in this case

[34] In 1999, as on some earlier occasions when someone retired from the partnership or was assumed a partner, the year-end accounts to 31 May gave a snap shot of the firm's financial position by reference to which the parties sought to regulate their interests. The balance sheet did not show any continuing liability to the SSSPF. That does not surprise. But if the partners had applied their minds to the matter, they should have been aware of a contingent liability which would arise if they chose to withdraw from the fund (see paragraph [8] above) or if the fund requested contributions because a deficit existed or occurred in future.

[35] The nature of the contingent obligation to the SSSPF is, I accept, different from the normal day-to-day obligations which a solicitors' practice incurs. Mr Barr had left his employment with Pattison & Sim; no other employees were members of the fund. The new partnership was thus not an assenting employer; and any liability to the SSSPF was contingent. Nonetheless, that liability was a liability incurred by the business and would pass to the new partnership if that partnership took on the business debts of its predecessor. I do not see the nature of the debt as analogous to the secured loan over the premises which the prior firm retained in its ownership in Stephen's Trustee. Nor do I accept the contention that the continuing business of Pattison & Sim would have obtained no benefit from the past work of Mr Barr as he would have contributed in some way to its goodwill from which the new partnership benefitted at its inception.

[36] I recognise that Ms McLaren's capital contribution was not insignificant. But it appears to have been a contribution fixed by custom and not an attempt to value her share of the partnership business. As at 31 May 1999 the net assets of the business were valued at £258,417. A one-third share of that sum would have exceeded £80,000. Further, there was no suggestion that that capital payment would be used to discharge prior debts of the business, although it may have been used to reduce the firm's overdraft when it was paid in 2000. While it may prevent a presumption from arising, I do not see it as a strong indication that the new partnership did not accept liability for the prior debts of the business.

[37] Nor am I persuaded that the partners' ignorance of the contingent liability to SSSPF in 1999 is of any materiality. I do not doubt that Ms McLaren was unaware of the liability. But an incoming partner when she enters a partnership, which continues its business without winding up the prior partnership, faces a risk that the prior accounts are not accurate in all respects and that there are unknown liabilities to be met. In my view, the question is whether the new partnership assumed responsibility for the prior debts of the business, including contingent liabilities, not whether the partners were aware of the extent or the precise nature of those liabilities. See paragraph [32] above.

[38] I consider that there are four factors which strongly support the inference that the new partnership assumed responsibility for the prior liabilities of the business. First, the business of Pattison & Sim continued with no outward change other than, I assume, the standard professional intimation to the Law Society and advertisement in its Journal of the assumption of a new partner. Secondly, while the partners maintained the practice of using year-end accounts to fix entitlements to capital and income and thus avoid apportionments within a financial year, they did not attempt to keep separate accounts for the partnership to 31 May 1999 and the new partnership which began on 1 June 1999 so that the former could be wound up in an orderly manner. Thirdly, in accordance with past practice in the business of Pattison & Sim, fees due for work, which both the former partnership and the new partnership carried out, were not apportioned between the two firms but were treated as income of the new partnership. Fourthly and similarly, liabilities incurred in the course of business were not allocated between the old partnership and the new firm but were paid by the new partnership out of its receipts.

Conclusion

[40] I therefore conclude, having regard to all of the circumstances revealed in the evidence which was presented to me at the debate, that the partnership of Pattison & Sim as it was constituted between 1 June 1999 and 31 May 2006 did assume responsibility for the prior business debts of the practice, including the contingent liability to the SSSPF.

[40] Although the debate was set down in January 2011 and parties were requested to lodge a Joint Minute of agreed facts by 22 February, counsel were not able to agree the terms of the Joint Minute until the eve of the debate and they did not formally renounce probation. My findings have been based on admissions in the pleadings, that Joint Minute and parties' agreement that I could treat the accounts to 31 May 1999 as accurate. I have used the affidavits, which the parties have lodged, only for background information. As I have said, I have not seen the current rules of the SSSPF. As parties have not renounced probation, I will have to enquire how they wish to proceed.

[41] I will have the case put out by order to determine further procedure.