Solicitors pension fund claim against legal firm and former partners to proceed to proof following appeal

The Inner House of the Court of Session allowed the action to proceed to a proof before answer after ruling that the commercial judge erred in dismissing the action on the basis that the trustees failed to plead a relevant case in law.

‘Inherited liabilities’

The Lord President, Lord Carloway, sitting with Lord Drummond Young and Lord Malcolm, heard that the pursuers sued the first defender Marshall Ross & Munro (MRM) as the successor of a number of partnerships commencing in 1949, while the second defender Charles Bow and third defender Patricia Grzybek were called as former partners and cautioners of the firm, which was dissolved in 2015 when Ms Grzybek retired.

The sum claimed, amounting to just under £90,000, was said to represent that part of the deficit in the fund arising in respect of three individual members who were formerly employees of one or more of the previous 16 iterations of the firm.

The pursuer averred that the firm of MRM 17, as currently constituted, “inherited” the “actual and contingent liabilities” of the predecessor partnerships.

At no point had the defenders given notice to the pursuers that they wish to withdraw from the fund as an “assenting employer”.

The pursuers sought to rely on the proposition that liability “transmitted” from one iteration of the firm to another, on the broad basis that it appeared to the outside world that the business of the firm appeared to be carried on by its successor.

‘Irrelevant case’

However, the defenders challenged the relevancy of the pursuers’ case on several grounds.

The commercial judge considered that the pursuers’ case rested on three assumptions: first, that the totality of the sum claimed was capable of “transmission”; secondly, that there was an “unbroken transmission” of the accrued liability from each firm to its immediate successor; and, thirdly, that the “totality” of what had accumulated had transmitted to the first defenders.

However, the judge ruled that the continuous use of the name MRM, the uninterrupted business, and the lack of any significant outward change to the firm, were not sufficient.

The pursuers’ primary case was dismissed as “irrelevant” as the pursuers made no averments of a tacit or express agreement by the first defenders to assume the liabilities of its predecessors, and that in any event the fact that no payments were made to the fund by MRM 15 was a “fatal break” in the chain.

The judge also held that the pursuers failed to discharge the onus that any obligation was not time-barred, having regard to the quinquennial prescriptive period.

‘Sufficient averments’

On appeal, the pursuers maintained that the commercial judge erred in dismissing the action and ought to have allowed a proof before answer.

It was argued that the pursuers had made “sufficient averment”s to invoke the transmission presumption, including the continuous use of the firm name, the portrayal on the firm’s website of its continuous existence “for over 100 years”, and, in relation to changes in the composition of the firm in 1989, 2000 and 2006, continued trading from the same office, under the same name.

At the stage of debate, the only issue was whether the pursuers had averred sufficient facts and circumstances to engage the presumption, and the agreement of a new partnership to take on liabilities, or any contingent liability owed by a predecessor partnership, could be established either by proof of the facts and circumstances or by the operation of the presumption, it was submitted.

It was also argued that the pursuers had averred that payments had been made within the five-year prescriptive period and that the judge erred in failing to acknowledge that deficit payments made by MRM between 2003 and 2012 interrupted any prescriptive period.

But the defenders contended that the commercial judge reached the “correct conclusion” for the reasons which she had given.

‘Proper investigation’

Allowing the appeal, the judges held that the action should proceed to proof before answer to enable a “proper investigation” of the facts in order to determine whether the presumption did operate and, if so, its precise effect in respect of the defenders’ liabilities to the pursuers.

In a written opinion, the Lord President said: “The pursuers have averred sufficient from which the court can infer that, in relation to their dealings with third parties, including the pursuers, the various successor MRM firms undertook to pay the debts of their predecessors. According to the pursuers’ averments, to the outside world (or at least that beyond the readership of the Law Society Journal), MRM were the same entity throughout. They traded from the same premises under the same name. They held themselves out to be the same business or firm.

“They paid some of the contributions called for after 2003. Of course, the different partnerships entered into different arrangements with themselves upon their various dissolutions. These will govern the liability of former or existing (as at the relevant date) partners to contribute to any sum found due by the first defenders to the pursuers (the issue in Sim v Howat (supra)). If the appropriate inference is drawn, however, these actual arrangements, which were unknown to the wider public, and, it is as yet assumed, to the pursuers, can have no bearing on the liability of the first defenders to the pursuers.

“Contrary to the commercial judge’s opinion, it may be enough in a given case that there was an uninterrupted practise of a particular business. That is certainly a prerequisite but, in the absence of other factors, it may be sufficient to engage the principle. A person, artificial or otherwise, who continues to trade in the same business under the same name may well be presumed to have undertaken former liabilities in the absence of an outward demonstration of a change of ownership behind the façade.“

Lord Carloway added: “The commercial judge was in error in saying that the pursuers have no averments from which a tacit undertaking (not necessarily ‘agreement’ with another) to assume the predecessor’s liabilities could be inferred. On the contrary, they have relevantly pled such a case.”