ARTICLES & UPDATES

One of the most common legal issues faced by partners in limited liability and general partnerships is whether a partner’s liability ends when they leave the company. It is important to note that leaving the company does not automatically free the partner from the company’s obligations and debts if they acted as a guarantor for those debts.

Under Kuwaiti law, a company is granted a separate legal personality, distinct from that of its partners. This legal personality enables the company to acquire rights, bear obligations, and maintain a financial liability independent from those of the partners. This separation allows the company to operate independently of the individuals who make it up.

It is essential not to confuse the company’s financial liability with that of the partners. In capital companies (such as limited liability companies and joint stock companies), a partner’s liability is generally limited to the amount of their paid-in capital. Creditors cannot pursue the personal assets of a partner beyond any unpaid portion of their share in the capital.

Furthermore, one should not confuse the company’s financial liability with its capital. The capital represents the minimum guarantee for creditors, while the company’s financial liability can fluctuate depending on its business performance, growing through profits or shrinking due to losses.

While creditors have general recourse against the company’s financial assets (not the personal assets of the partners), however, there are cases where the partner’s liability becomes joined with the company’s financial liability, making the partner responsible for the company’s debts. The most significant of these are personal guarantees or undertakings signed by the partner in favor of banks or creditors. These guarantees remain binding even after the partner exits the company.

In such cases, the partner’s personal assets become liable alongside the company’s assets. If the company defaults on its obligations, creditors may claim directly against the partner’s personal funds. Signing a personal guarantee and undertaking to repay company obligations creates a legal responsibility that does not expire simply because the partner has exited or transferred their share in the company. That liability continues unless the guarantee agreement is renewed or replaced by a new guarantee from an incoming partner, subject to that new partner’s explicit consent, as guarantees cannot be presumed.

Therefore, any partner intending to transfer their shares or exit the company must review all contracts and personal undertakings they have signed on behalf of the company. It is essential to terminate or substitute any personal guarantees, with the creditor’s approval, and to clearly document such arrangements in the amended company contracts and addenda.

In conclusion, exiting the company or transferring one’s shares does not automatically release a partner from prior debts or personal guarantees. Legal liability continues to exist unless a new agreement is executed between the creditors and the new guarantor, and the exiting partner is expressly discharged.

This article was recently published in Aleqtisadyah newspaper. You can view the original in Arabic in the newspaper clipping above and https://aleqtisadyah.com/archives/16555 .

Lawyer / Abdulrazzaq Abdullah E-mail: azq@arazzaqlaw.com