Comment: Faces may change but liability remains the same

What is on the face of it a 'pensions' case has much broader implications, says Ennis. Picture: contributed.
What is on the face of it a 'pensions' case has much broader implications, says Ennis. Picture: contributed.
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A judgement recently issued by the Inner House of the Court of Session, in a case closely ­followed for some years by many of ­Scotland’s law firms, has implications for the wider business community.

It concerns the Scottish Solicitors’ Staff Pension Fund, and the liability of law firms to contribute to it. The fund was set up in 1947 to provide pensions to the employees of solicitor firms, but closed to new ­members in 2003, by which point, as in many schemes, a funding deficit had ­arisen.

While many of the members have retired, a significant minority are yet to draw their pension. The fund is engaged in recovering outstanding contributions due by numerous firms, including Marshall Ross & Munro Solicitors (MRM).

The trustees of the fund, represented by Pinsent Masons, argued that MRM is liable to meet the costs of pensions for members employed by the firms’ predecessors in business. ­However, the firm argued that because the partners of the firm had changed since the ­members were employed, it had no ­liability.

MRM had previously successfully argued that it was a series of separate entities and therefore any liability that one partnership incurred simply ended when that ­particular partnership ended. The defenders therefore argued that even although the name was the same, the firm that the fund had sued was a different firm to that which was actually liable for the debt.

Reversing an earlier decision, the Inner House 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, including “contingent” liabilities to pay contributions to meet pension scheme ­deficits, stick with the business.

This case 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 protects ­creditors from the risk that they may not be able to recover amounts due when there has been a change of ownership over which they have no control. The case robustly ­reaffirms the position that in such circumstances, the old and new partners ­cannot leave liabilities to third parties behind where the business continues unchanged.

The court gave a detailed analysis of case law and of the Joint Report issued by the Scottish Law Commission and the Law Commission (of England and Wales) and 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 in the fund are in similar positions to MRM in terms of longevity of partnership. However, this case sends a clear message about the perils of adopting an apparently technical argument to avoid liability.

What is on the face of it a “pensions” case 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.

Of more general significance is the opinion of Lord Drummond Young, who ­reiterates two important principles. Firstly, pension schemes are designed to be long-lasting and must be capable of adapting to changing external factors. Secondly, one employer failing to pay their liabilities can have significant repercussions for the whole scheme.

The ruling 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 so common these days, they still serve a purpose for certain businesses.

This definitive and robust judgement not only removes doubt regarding pension liabilities but has a broader impact on partnership law.

Frances Ennis, senior associate at law firm Pinsent Masons