Factual and Procedural Background
In 2018, a partnership of solicitors, Company A, provided legal advice to the Plaintiff in connection with a breach of warranty claim arising from a Share Purchase Agreement. The Plaintiff alleges that Company A gave negligent advice regarding the service of a notice under the agreement, which weakened the Plaintiff's negotiating position and forced a settlement for significantly less than the claim's value, quantified at £2.25 million. In September 2019, Company A converted into a limited liability partnership, Company B, transferring all business assets and liabilities to the new entity pursuant to a Transfer Agreement. The Plaintiff seeks to hold Company B liable for the alleged negligence and breach of contract originally attributed to Company A. Company B contests liability, arguing that no novation occurred to transfer obligations to it and that the Plaintiff must pursue Company A and its former partners. The court was asked to consider the relevancy of the Plaintiff's action against Company B on the basis of this dispute.
Legal Issues Presented
- Whether the liabilities of Company A were effectively transferred to Company B such that Company B assumed the obligation to make reparation to the Plaintiff.
- Whether the Plaintiff's consent to novation of the obligation to Company B can be inferred from the circumstances, including the Plaintiff's election to sue Company B.
Arguments of the Parties
Defender's Arguments
- The Plaintiff failed to plead a relevant case that Company B is liable to the Plaintiff.
- Novation requires the consent of all parties, including an express or implied offer to novate communicated to the Plaintiff, which is absent here.
- The Transfer Agreement is irrelevant to the Plaintiff as it was not a party to it, and the agreement was not properly intimated to the Plaintiff.
- The Plaintiff made no averments that Company B continued the business or that conduct inferred willingness to novate.
- The presumption of transfer of liabilities between partnerships does not apply because the transfer was from a partnership to a limited liability partnership, constituting an outward change.
- The Plaintiff's election to sue Company B cannot amount to novation without an offer to novate.
Pursuer's Arguments
- The issue is whether the obligations owed by Company A have been effectively novated to Company B, entitling the Plaintiff to enforce those obligations against Company B.
- The Plaintiff relies on an express agreement in the Transfer Agreement whereby Company B assumed all liabilities of Company A.
- The Plaintiff does not rely on any presumption of liability transfer but on the express contractual assumption of liabilities by Company B.
- The Plaintiff's consent to novation can be inferred from its decision to sue Company B after learning of the Transfer Agreement.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Scottish Pension Fund Trustees Ltd v Marshall, Ross & Munro 2018 SC 523 |
Presumption that liabilities transfer with assets in successive partnerships; novation requires creditor consent; unilateral obligation theory. |
The court applied the principle that novation can be inferred from conduct and that the new entity undertakes liabilities, with the old partnership remaining liable as well. |
| Sim v Howat [2011] CSOH 115 |
Detailed review of liability transfer on partnership changes; presumption of liability transfer; legal mechanism of unilateral undertaking. |
The court relied on Lord Hodge’s analysis to support that express agreement to assume liabilities suffices for novation and that unilateral obligations can bind the new entity. |
| Heddle's Executrix v McLaren (1888) 15 R 698 |
Equity requires creditors to retain hold on assets after business transfer to prevent fraud. |
Supported the equitable foundation for holding the new business entity liable for old debts to avoid injustice to creditors. |
| Ocra (Isle of Man) Ltd v Anite Scotland Ltd 2003 SLT 1232 |
Non-application of presumption where there is an outward change in business form without express agreement. |
Distinguished as not applicable because in the present case there was an express agreement to assume liabilities. |
| Darknell-King v Slater and Gordon UK Ltd and Others [2024] CSOH 100 |
Presumption of liability transfer does not apply where business form changes significantly without express agreement. |
Used to show that the presumption does not apply automatically to transfers from partnerships to LLPs absent express agreement. |
| Lujo Properties Ltd v Green 1997 SLT 225 |
Continued liability of former partners despite new partnership assuming debts. |
Supported the concept that the old partnership remains liable alongside the new entity. |
| Stephen's Trustee v Macdougall & Co's Trustee (1889) 16 R 779 |
Requirement for express undertaking or inferred dealings to establish liability assumption when partnership contract excludes liability. |
Distinguished as the present case involves an express agreement to assume liabilities, unlike the exclusion in that case. |
Court's Reasoning and Analysis
The court began by situating the case within Scots law principles concerning the transfer of business assets and liabilities from one legal entity to another, emphasizing the need to prevent injustice to creditors. The court referenced foundational authorities, including Lord Hodge’s analysis in Sim v Howat and the Scottish Pension Fund Trustees Ltd case, which clarified that a presumption exists whereby liabilities transfer with assets, subject to certain conditions and the consent of the creditor.
The court noted that the present case differs from those where the presumption does not apply because there is an express agreement in the Transfer Agreement that Company B assumed all liabilities of Company A. This express contractual assumption obviates the need to rely on any presumption of tacit liability transfer.
Addressing the concept of novation, the court rejected the defender’s argument that a separate, explicit offer and acceptance of novation by the creditor is required. Instead, it found that novation in this context can be inferred from the creditor’s conduct, such as electing to sue the new entity after learning of the liability assumption. The court relied on the reasoning that novation is closely linked to the presumption of liability transfer and that such a rigid contractual novation requirement would undermine the presumption and lead to unjust outcomes.
The court further explained that the legal mechanism underpinning such liability transfer may be viewed as a unilateral binding obligation by the new entity to pay the debt, enforceable by the creditor, consistent with Scots law’s recognition of unilateral obligations. This mechanism allows the creditor to pursue either or both the old and new entities, preserving creditor protection.
The court concluded that the Plaintiff’s pleadings sufficiently aver that Company B agreed to assume the liabilities and that the Plaintiff consented to novation by electing to pursue Company B. The court found no merit in the defender’s contention that the Plaintiff’s consent was lacking or that further formalities were required.
Holding and Implications
The court refused the defender’s motion to dismiss the action and fixed a proof before answer, reserving all further pleas-in-law and questions of expenses.
The direct effect is that the Plaintiff may proceed to prove its claim against Company B on the basis that Company B assumed the liabilities of Company A under the Transfer Agreement and that novation of the obligation has occurred by the Plaintiff’s conduct. No new legal precedent was established, but the decision confirms the application of established principles regarding liability transfer, novation, and unilateral obligations in the context of a partnership converting into a limited liability partnership.