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Partnership Debts – Who’s Liable?

If you’re in a business partnership, there are certain issues you should be aware of, especially when it comes to business debts.  Some partnerships are organised on the basis of a partnership agreement, usually drawn up by a solicitor and signed by all partners.  This agreement should cover issues, including the following:

  • How the profits and losses should be shared
  • Whether salaries will be paid
  • Who has the authority to enter into contracts on behalf of the company
  • How much of the company’s debts each partner agrees to pay
  • The circumstances in which the partnership will be dissolved

If there is no written agreement, then it may be difficult to establish whether or not a partnership actually exists.  However, according to the Partnership Act 1890, there is good evidence that a business is a partnership if “more than one person receives a share of business profits”. 

When it comes to any partnership debts, creditors will expect the company to pay its debts.  However, if the company is unable to pay due to lack of funds, creditors may then ask individual partners to settle the amounts owed.  Creditors are permitted to take legal action against more than one partner simultaneously, even in cases where a partnership agreement says otherwise. 

All partners enjoy what’s known as a “fiduciary relationship” with the company, meaning that their actions must be in the best interests of the company and the other partners.  All partners in a company are liable for the actions individual partners take on behalf of the company.

A “silent partner”, though not involved in the day to day management of the company, is still jointly liable for the company’s debts.

If one partner pays more than their agreed share of the company debt, that partner may resort to court action in order to recover the money they paid on behalf of another partner.  A person who leaves a partnership will still be liable for any debts accrued by the company before they left, unless:

  • They have obtained an agreement to this from the other partners and the creditors; and
  • Their name has been removed from any company stationery.

A partner who joins a partnership will not be deemed liable to pay any of the company’s debts that were accrued before they joined, unless they have signed a written agreement to do so.

If your partnership is faced with debts that are difficult to settle, try to negotiate with creditors and carry on trading if at all possible.  You’ll need to draw up a business budget plan that shows the company’s outgoings and income and determine the average company income over a period of between 3 and 12 months, as well as the outgoings.  Don’t forget to budget for income tax on profits and value added tax (VAT) when doing this.  You may find it more convenient to task your accountant with this job. 

If the company is still making a profit when all outgoings have been taken into account, it’s worth making offers to your creditors to pay the debt over an agreed period of time.