Partner's Liability After Exit

Under Swedish law, a partner remains liable for partnership debts existing at the time of a partner’s exit from the partnership. A Swedish Court of Appeals recently affirmed a lower-court ruling that such liability remains even if the partnership’s creditor consents to the transfer of the partner’s share in the partnership to a new party. To eliminate continued liability after exit, a partner must secure an express release of liability from the creditors.

In the case under review, Mölndalsfastigheter AB became general partner in a limited partnership in September 1992. The limited partnership, which had one asset, a parcel of real estate, had previously received a loan of more than 4 MSEK. In August 1993, Mölndalsfastigheter AB transferred its share in the limited partnership to Wallenstam I Göteborg AB. Mölndalsfastigheter apparently requested and received the creditor’s consent to the transfer of the share to Wallenstam. The terms of the loan stated that if the parcel of real estate were to be transferred, the person acquiring the property was required to seek creditor approval to also assume liability for the loan. Mölndalsfastigheter apparently assumed that this consent provision also applied to transfer of shares as well. In any event, the transfer to Wallenstam was approved by the creditor. There were subsequent transfers of the shares and the limited partnership ultimately went bankrupt in 2001. The creditor contacted Mölndalsfastigheter in 2005 and demanded repayment of the loan and commenced legal proceedings in 2007.

Mölndalsfastigheter’s main argument was that approval of the share transfer to Wallenstam constituted a release of Mölndalsfastigheter’s liability for the partnership debts. Not so, said the district court in a ruling that now has been affirmed on appeal. The court’s analysis focused on the statutory provision that liability for partnership debts existing at a partner’s exit continue. While the parties are free to agree on a release, it is the departing partner that must prove that such agreement has been reached with the creditor. An agreement of this kind will not be implied from a creditor’s consent to the share transfer.

This case shows that it is not only the incoming partner that must use care to determine the extent of the liability he is assuming, but also the exiting partner must carefully extinguish it’s liability if that is the parties’ intention.

Author’s Note: This was my first blog entry in English. Let me know if there is any preference for Swedish or English entries and I will try to accommodate my readers.

Hovrätten för Västra Sverige, mål nr T 1063-10, den 31 maj 2010