Fanny uses her new-found loathing of Nicholas to make life difficult for the only friend he has at the school: Smike, whom Squeers takes to beating more and more frequently. One day Smike runs away, but is caught and brought back to Dotheboys. Squeers begins to beat him, but Nicholas intervenes. Squeers strikes him across the face and Nicholas snaps, beating the schoolmaster violently. Quickly packing his belongings and leaving Dotheboys Hall, he meets John Browdie on the way. Browdie finds the idea that Squeers himself has been beaten uproariously funny, and gives Nicholas money and a walking staff to aid him on his trip back to London. At dawn, he is found by Smike, who begs to come with him. Nicholas and Smike set out towards London.
Meanwhile, Kate and her mother are forced by Ralph to move out of their lodgings in the house of the kindly portrait painter Miss LaCreevy and into a cold and drafty house Ralph owns in a London slum. Ralph finds employment for Kate working for a fashionable milliner, Madame Mantalini. Her husband, Mr Mantalini, is a gigolo who depends on his (significantly older) wife to supply his extravagant tastes and offends Kate by leering at her. Kate proves initially clumsy at her job, which endears her to the head of the showroom, Miss Knagg, a vain and foolish woman who uses Kate to make herself look better. This backfires when a client prefers to be served by the young and pretty Kate rather than the ageing Miss Knagg. Kate is blamed for the insult, and as a result, Kate is ostracised by the other milliners and left friendless.
Nicholas seeks out the aid of Newman Noggs, who shows him a letter that Fanny Squeers has written to Ralph viciou