F4 – The Formation and Constitution of

Business Organisation
Tutor Question

The multi-task questions that appear in Section B of the exam contain several tasks based on the same scenario.
Read through the background and the first Task below.

Background for Tasks 1, 2 and 3 Task 1

Clare, Dan and Eve formed a partnership 10 years Which of the following states the liability of Clare as a
ago, although Clare was a sleeping partner and never sleeping partner?
had anything to do with running the business. Last year
Dan retired from the partnership. Eve has A. She has limited liability for partnership debts set at
subsequently entered into two large contracts. The first a pre-determined level
one was with a long-standing customer, Greg, who had
dealt with the partnership for some five years. The B. She has limited liability set at the amount she has
second contract was with a new customer, Hugh. Both introduced into the partnership
believed that Dan was still a partner in the business.
Both contracts have gone badly wrong, leaving the C. She has full liability for partnership debts
partnership owing £50,000 to both Greg and Hugh.
Unfortunately the business assets will only cover the D. She has no liability for partnership debts
first £50,000 of the debt.

This task tests your knowledge of the liability of ‘sleeping partners’. The scenario states that Clare, Dan and Eve
formed a partnership. There is no mention of forming a limited partnership or of an agreement to limit the liability
of Clare. Therefore, the partners, including Clare, are jointly liable for all partnership debts. So, the correct answer
is, She has full liability for partnership debts.
Moving on to Task 2. The same background applies. Read through the requirement for Task 2.

Background for Tasks 1, 2 and 3 Task 2

Clare, Dan and Eve formed a partnership 10 years Which of the following describes the liabilities of Dan
ago, although Clare was a sleeping partner and never as a retiring partner?
had anything to do with running the business. Last year
Dan retired from the partnership. Eve has A. His liability for any debts ceases on retirement
subsequently entered into two large contracts. The first
one was with a long-standing customer, Greg, who had B. He remains liable to existing customers for a period
dealt with the partnership for some five years. The of six months
second contract was with a new customer, Hugh. Both
believed that Dan was still a partner in the business. C. He remains liable for any debts or obligations
Both contracts have gone badly wrong, leaving the incurred by the partnership prior to retirement
partnership owing £50,000 to both Greg and Hugh.
Unfortunately the business assets will only cover the D. He remains liable to new customers who knew
first £50,000 of the debt. he was a member of the partnership, unless he
declared his withdrawal

This task concerns the liability of a retiring partner. Thinking back to the course, we learnt that a partner who retires
remains liable for debts incurred while they were a partner. We also learnt that a retired partner remains liable for
debts incurred after retirement to parties who were aware of the partner’s status before retirement who have not
been informed of the partner’s withdrawal from the partnership. Therefore, the correct answer is; He remains liable
to new customers who knew he was a member of the partnership, unless he declared his withdrawal.
Moving on to Task 3. Again, the same background applies. Read the requirement for Task 3.

Background for Tasks 1, 2 and 3 Task 3

Clare, Dan and Eve formed a partnership 10 years From whom can Greg claim the outstanding debt?
ago, although Clare was a sleeping partner and never
had anything to do with running the business. Last year
Dan retired from the partnership. Eve has A. Eve only
subsequently entered into two large contracts. The first
one was with a long-standing customer, Greg, who had B. Eve and Clare only
dealt with the partnership for some five years. The
second contract was with a new customer, Hugh. Both C. Eve, Dan and Clare
believed that Dan was still a partner in the business.
Both contracts have gone badly wrong, leaving the D. Eve and Dan only
partnership owing £50,000 to both Greg and Hugh.
Unfortunately the business assets will only cover the
first £50,000 of the debt.

As we explained in our answer to Task 1, the default position in an unlimited partnership is that every partner is
jointly liable with the other partners. Clare’s lack of day-to-day involvement, and Dan’s retirement, have not
changed this position in relation to Greg’s claim. Greg knew of Dan’s status as a partner before contracting with
the partnership, and he had not received notification of Dan’s withdrawal when the contract was formed. Therefore,
all three partners remain liable and the correct answer is Eve, Dan and Clare.