Partnership pension liability case will have far-reaching impact

Reversing an earlier decision, the Inner House of the Court of Session held that where a business continues on the same basis before and after a change in the partnership running it, there is a legal presumption that all liabilities stick with the business – including 'contingent' liabilities to pay contributions to meet pension scheme deficits. In other words, they become liabilities of the new partnership, and do not disappear along with the old partnership.

The judgment (41-page / 531KB PDF) confirms that, where to the outside world a business continues on the same basis but with different partners owning it, then the new partners are presumed to have taken on the liabilities of the former firm. This presumption does not stop at pension liabilities. For example, it protects creditors from the risk that they may not be able to recover amounts due to them when there has been a change of ownership over which they have no control, or which they may be completely unaware of.

The Scottish Solicitors' Staff Pension Fund ('the fund') was set up in 1947 to provide pensions to the employees of law firms. It closed to new members in 2003, by which point, as is common in many schemes, a funding deficit had arisen. While many of the scheme members have retired, a significant minority are yet to draw their pension.

The trustees have been trying to recover outstanding contributions due to the fund by numerous firms, calculated according to a member's salary and length of service. One of those firms is Marshall Ross & Munro Solicitors (MRM). MRM has argued that because the partners of the firm have changed since the scheme members were employed, it has no liability. The trustees, represented by Pinsent Masons, the law firm behind Out-Law.com, have argued that the firm is liable to meet the costs of pensions for members employed by the firms' predecessors in business.

MRM had previously successfully argued that it was in fact a series of separate entities, and therefore any liability which one partnership incurred simply ended when that particular partnership ended - basically, when a partner joined or left. Its argument was that even though the name was the same, the firm which the pension fund had sued was a different firm to that which was actually liable for the debt.

The Inner House has now reversed that decision. Along the way, the court gave a detailed analysis of the case law and of a 2003 joint report on the law of partnerships, issued by the Scottish Law Commission and the Law Commission of England and Wales. It concluded that the principle was well established: where a firm takes over another, with no outward display of change, there is a presumption that it inherits the debts of its predecessor.

Many other employers within the fund are also long-running partnerships in similar positions, but this case sends a clear message about the perils of adopting an apparently technical argument in an attempt to avoid liability. The case is more than just a 'pensions' case, however, and has much broader implications for the commercial world. The decision has taken a step towards reconciling the tension between a technical interpretation of partnership law and the reality of the day-to-day operation of a business - it is good news for creditors.

From a pensions perspective, the opinion of Lord Drummond Young is significant as it reiterated two important principles. Firstly, pension schemes are designed to last for prolonged periods of time and must be capable of adapting to changing external factors. Secondly, one employer failing to pay its liabilities can have significant repercussions for the whole scheme.

The ruling also clears up the sometimes contentious issue of the transfer of debt within partnerships, which has huge implications for general corporate law. While partnerships are perhaps not the most common corporate structure these days, they still serve a purpose for certain businesses. This definitive and robust judgment not only removes doubt regarding pension liabilities but has a broader impact on partnership law.

Frances Ennis is a pensions disputes expert at Pinsent Masons, the law firm behind Out-Law.com. Frances was part of the team which advised the trustees of the Scottish Solicitors' Staff Pension Fund in this case.