Express Assumption of Liabilities in Business Conversions: A Landmark Clarification on Novation under Scots Law

Introduction

The case of Andrew Marr International Limited against Mackinnons Solicitors LLP ([2025] CSOH 20) before the Scottish Court of Session represents a critical judicial development regarding the transfer and novation of liabilities following a business conversion. The dispute arose in the context of a Share Purchase Agreement (SPA) claim where the pursuer, Andrew Marr International Limited (“the pursuer”), alleged that Mackinnons Solicitors LLP, acting as the legal adviser during an SPA transaction, provided negligent advice which significantly weakened its position. The claim revolves around a breach of contract and negligence that allegedly resulted in a monetary loss evaluated at £2.25 million.

Central to the dispute is the legal effect of a Transfer Agreement that transformed the traditional partnership, Mackinnons, into a limited liability partnership (LLP) in 2019. The controversy focuses on whether the liabilities—including those arising from alleged professional negligence and breach of contract—had been transferred and thereby novated to the new entity. The decision addresses complex issues concerning the interpretation of contractual novation, the inference of creditor consent, and the broader implications for business conversions under Scots law.

Summary of the Judgment

In his opinion, Lord Braid held that the Transfer Agreement expressly provided that Mackinnons Solicitors LLP, the newly formed LLP (“the defender”), assumed all of the liabilities of the predecessor general partnership. This assumption was clearly evidenced by the contractual language incorporated into the pleadings, specifically clauses dealing with liabilities and the obligations to perform, pay, and discharge them when due.

The judgment rejected the defender’s argument that an independent novation process—with explicit consent from the creditor—was required to transfer the liabilities. Instead, Lord Braid inferred that the pursuer’s conduct, namely its decision to pursue the new entity for the liabilities after becoming aware of the Transfer Agreement, provided the necessary implied consent to the novation. The court emphasized that enforcing the liability against the defender served the equities inherent in business transfers, thereby upholding the principle that creditors must be able to claim reparation from the party that assumed the liabilities.

Analysis

Precedents Cited

The opinion significantly engages with critical precedents that have shaped the understanding of liability transfer in business conversions:

Scottish Pension Fund Trustees Ltd v Marshall, Ross & Munro [2018] SC 523: This case was used to discuss the presumption that a new business entity may assume the liabilities of its predecessor, particularly when there is continuity in the business. Lord Drummond Young’s commentary in that decision was pivotal in emphasizing the equitable considerations underlying automatic transfer of liabilities.
Sim v Howat [2011] CSOH 115: Lord Hodge’s analysis in this case was instrumental, particularly his observation that an express assumption of liabilities obviates the need to establish an independent novation. The judgment relied on his views regarding the flexibility of Scots law in treating unilateral obligations assumed by the new entity.
Older authorities such as Heddle's Executrix v McLaren (1888) and Stephen's Trustee v Macdougall & Co's Trustee (1889): These historical cases underpin the argument that a transfer of assets is frequently accompanied by an assumption of debts, especially when such transfer is gratuitous or involves continuity of business.

These precedents collectively influence the court’s decision by establishing a flexible, equitable approach: one that recognizes that in the context of a business conversion, the explicit assumption of liabilities in a contract should suffice to impose responsibility upon the new entity—even in the absence of a renewed contract with the creditor.

Legal Reasoning

The reasoning pivots on both contractual interpretation and equitable principles:

Express Agreement in the Transfer Agreement: The court underscored that Clause 3 of the Transfer Agreement clearly defined liabilities to include any obligations of the old partnership, and by expressly stating that these liabilities were to be assumed by the defender, there was no need to invoke a separate legal mechanism of novation.
Implied Consent by the Pursuer: The pursuer’s decision to continue litigation against the LLP, following the revelation of the Transfer Agreement, was taken as an indication of its consent to novation. This reasoning borrows from established precedents where the creditor’s election to sue a new debtor was sufficient to imply acceptance of the transfer of obligations.
Inapplicability of a Rigid Novation Requirement: Although the defender argued that a new contract was necessary—requiring explicit creditor consent—Lord Braid dismissed this argument by referencing the flexible and equitable approach in Scots law. He noted that enforcing the strict requirement would be contrary to the purpose of asset transfer, which is to ensure business continuity and fairness to creditors.

Impact

This judgment is likely to have a significant impact on future cases involving business conversions and liability transfers. Key implications include:

Clarification of Novation Principles: The decision clarifies that an express contractual assumption of liabilities negates the need for a separate, formal novation process with explicit creditor consent, provided that the creditor’s conduct implies consent.
Enhanced Creditor Protection: By allowing creditors to enforce obligations against the new debtor based on the presumption of liability transfer, the ruling enhances protections against potential evasion of debt responsibility through the mere change in business form.
Guidance for Business Structuring: Firms contemplating transitions from partnerships to limited liability partnerships can now rely on the judicial stance that well-drafted transfer agreements that expressly assume liabilities will generally be upheld. This provides strategic certainty in structuring such transactions.

Complex Concepts Simplified

The judgment employs several complex legal concepts, which are clarified below:

Novation: Traditionally, novation is the process by which one party transfers its contractual obligations to a third party, often requiring the explicit consent of the creditor. In this case, the court held that, particularly in business transfers, an express agreement to assume liabilities effectively constitutes a unilateral novation, even if the creditor’s consent is only implied through their conduct.
Assumption of Liabilities: This term refers to the process by which a new entity agrees to take on all existing debts and obligations of the old business. The Transfer Agreement in this instance served as a clear instrument transferring all such liabilities, meaning that the new entity is bound to fulfil any outstanding liabilities including those arising from contractual breaches or negligence.
Presumption in Business Transfers: Scots law historically maintains a presumption that when a business is transferred, accompanying liabilities are also transferred to uphold fairness. Here, even though the traditional presumption was not strictly necessary because of the express language in the Transfer Agreement, the court noted that similar equitable principles support the decision.

Conclusion

In summary, the decision in Andrew Marr International LTD against Mackinnons Solicitors LLP marks a significant judicial confirmation regarding the treatment of liabilities in business conversions. The court held that an express commitment in a Transfer Agreement, coupled with the pursuer’s subsequent actions, is sufficient to imply a novation of obligations from the old partnership to the limited liability partnership. The ruling reinforces that creditors are entitled to enforce debts against the new entity, thereby maintaining the equitable balance intended by the transfer of business assets and liabilities.

The judgment not only clarifies the legal framework surrounding novation in the context of business conversions but also sets a precedent that will influence future cases. By affirming that strict formalities can be relaxed in favor of practical and equitable outcomes, the Court of Session has provided valuable guidance for both creditors and firms undergoing similar transformations under Scots law.