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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Gill v Sandhu [2005] EWHC 43 (Ch) (26 January 2005)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2005/43.html
Cite as: [2005] 1 All ER 990, [2005] 1 WLR 1979, [2005] WLR 1979, [2005] EWHC 43 (Ch)

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Neutral Citation Number: [2005] EWHC 43 (Ch)
Case No: CH/2004/PTA/618

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL
26/01/2005

B e f o r e :

THE HONOURABLE MR JUSTICE LIGHTMAN
____________________

Between:
HARDIP SINGH GILL
Respondent/Claimant
- and -

KULBIR SINGH SANDHU
Appellant/Defendant

____________________

Mr Mark Blackett-Ord (instructed by SKT Thobhani, Solicitor, 2 Greenpark Court, 226 Bridgewater Road, Wembley, Middlesex HA0 1YF) for the Appellant/Defendant
Mr Timothy Walker (instructed by Lindops, 35 Clarence Street, Southend-on-Sea, Essex SS1 1BH) for the Respondent/Claimant
Hearing date: 13th January 2005

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    Mr Justice Lightman:

    INTRODUCTION

  1. This is an appeal from a decision dated the 24th September 2004 ("the Decision") of Master Bowles. It is concerned with the construction of section 42 of the Partnership Act 1890 ("the Act") and in particular with the entitlement of an outgoing partner in respect of the profits made by a continuing partner attributable to his use of partnership assets between dissolution of the partnership and completion of its winding up. Section 42 of the Act reads as follows:
  2. "Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement to the contrary, the outgoing partner or his estate is entitled as the option of himself or his representatives to such share of the profits made since the dissolution as the Court may find to be attributable to the use of his share of the partnership assets, or to interest as the rate of five per cent per annum on the amount of his share of the partnership assets."

    The issue between the parties focuses on the meaning of the words "share of the partnership assets".

    FACTS

  3. The full facts of this case are set out in the Decision. It is sufficient to say that in 1995 the claimant Mr Sandhu and the defendant Mr Gill agreed as partners at will to purchase the property known as 59 Mountdale Gardens, Leigh On Sea, Essex (the Property") to convert the Property into an old peoples' residential home and to carry on business of such a home at the Property. The Property was accordingly purchased, converted and used.
  4. The parties executed a partnership deed ("the Deed") on the 12th September 1995 setting out the terms of the partnership. By the Deed the parties agreed that Mr Sandhu should manage the home and that the net profits should be applied first in payment of a salary to Mr Sandhu in respect of the provision of such services (the figure of £22,000 a year was agreed in the course of the proceedings) and subject thereto should be divided equally between them, and that the partnership assets (which included the Property) should belong to the partners equally.
  5. The parties agreed to make equal contributions to the capital of the partnership of approximately £85,000. Mr Gill made his contribution in 1995. Mr Sandhu had only sufficient liquid funds to pay £21,250 and borrowed the balance from Mr Gill. Mr Sandhu agreed to repay the loan on the sale of certain properties in which he had invested and in the meantime to pay to Mr Gill in lieu of interest the rental income obtained from them.
  6. Mr Sandhu managed the home from the date that it opened until the 12th April 1999 when differences arose between the parties leading Mr Gill to exclude Mr Sandhu from the Property on that date. Mr Gill thereafter without the consent of Mr Sandhu carried on the business on his own account. It is agreed that the partnership was dissolved on that date. The business proved profitable under the management of Mr Gill and indeed as well as producing revenue profits the business over that period has increased in value from £600,000 to £850,000, producing a capital profit of £250,000.
  7. It is common ground that: (1) substantially more was due to Mr Gill than to Mr Sandhu in respect of payment of capital and advances and that Mr Sandhu owed a substantial sum to Mr Gill in respect of his loan of the larger part of his share of capital; and (2) at the date of dissolution of the partnership the assets of the partnership were sufficient to pay debts to non partners and advances from the partners, but were insufficient to repay to the partners their capital in full.
  8. THE ISSUE

  9. Mr Sandhu commenced these proceedings on the 7th May 1999 seeking the winding up of the partnership. A multitude of issues were raised in the proceedings which came before and were resolved by Master Bowles. It was clear and common ground that Mr Sandhu was entitled to share the capital profit of £250,000: the full proceeds of sale falls to be applied in accordance with section 44 of the Act (see Barclays Bank v. Bluff [1982] Ch 172). But there was an issue as to the entitlement of Mr Sandhu to a share of the revenue profits made by Mr Gill between the 12th April 1999 and the conclusion of the winding up.
  10. Mr Sandhu contended that: (1) in section 42 "share of the assets of the partnership" means "share of the proprietary ownership of everything belonging to the partnership at the date of dissolution having money value"; (2) the profits were attributable in part to the services of Mr Gill and as to the balance to the use of partnership assets; and (3) accordingly (subject to a payment to Mr Gill of a fair return for his services) the balance of the profits should be divided equally between Mr Sandhu and Mr Gill reflecting the half share which each of them had at the date of dissolution in the partnership assets.
  11. Mr Gill however contended that: (1) in section 42 the term "share of partnership assets" means "share of net partnership assets after payment of all debts and liabilities owing to non-partners"; (2) by reasons of the disproportionate share of advances and capital provided by Mr Gill and the sums due from Mr Sandhu to Mr Gill at the date of dissolution the value of Mr Sandhu's share of the net partnership assets was nil or considerably less than half; and (3) for that reason Mr Sandhu was entitled either to no share of the profits or alternatively to the proportion of the net profits after deduction of the management charge which his share of the net assets bore to the total net assets of the partnership at the dissolution date. In a word Mr Gill contended that Mr Sandhu should receive the proportion of the profits which reflects the value of his share or interest in the partnership.
  12. The Master upheld Mr Sandhu's contention and decided that, subject only to the entitlement of Mr Gill to a payment at the rate of £22,000 per annum in respect of the provision of his services of carrying on the business of the home during the period, Mr Sandhu was entitled as claimed to a half share of the profits made by Mr Gill. The Master ordered an interim payment of £25,000 and refused permission to appeal. An application was made to me for permission to appeal on this one issue. On the appeal Mr Gill relied on a decision which supported his contention but which had not been cited to the Master, namely the decision of HH Judge Behrens in Taylor v. Grier No 3 dated the 12th May 2003 ("Taylor"). In the circumstances I gave permission to appeal and now determine the substantive appeal.
  13. THE LAW

  14. At common law subject to the provision of the partnership agreement each partner has a proprietary interest in all the assets of the partnership. The size of the proprietary interest is determined by the provisions of the partnership agreement, but in default of such provision each partner has an equal share. In the present case under the Deed Mr Gill and Mr Sandhu had (as would otherwise have been implied by law) equal proprietary interests in the assets of the Partnership. The rights attaching to the proprietary interests of the partners are severely qualified by the rights of all partners regarding the use and application of the assets and their proceeds of sale arising from the partnership relationship now contained in the Act.
  15. On the dissolution of a partnership (in default of agreement to the contrary) the partners have not only the right, but the duty, to realise the partnership properly and for the purpose of that realisation to carry on the business if it is necessary so to do: see In Re Bourne [1906] 2 Ch 427 at 430 Vaughan Williams LJ. The part of the Act headed "Dissolution of Partnership and its consequences" embraces sections 32-44. Section 39 of the Act provides that on dissolution of a partnership every partner is entitled as against the other partners in the firm and all persons claiming through them in respect of their interests as partners to have the affairs of the partnership wound up and in particular to have the property of the partnership applied in payment of the debts and liabilities of the firm and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm. The provisions of section 39 must be read as being subject to any agreement of the partners to the contrary. The parties may agree that on dissolution on the death, retirement or expulsion of an outgoing partner his share shall accrue or be sold to the continuing partners and that in respect of that accrual or sale a price shall be payable to the outgoing partner or his estate. In that situation (subject to any agreement between the parties) the amount due from the continuing partners in respect of the outgoing partner's share shall constitute a debt accruing at the date of dissolution. Questions have been raised as to the true construction of section 43 of the Act. In my judgment section 43 merely declares the law to this effect: see Lindley & Banks on Partnership 18th ed para 23-34.
  16. Section 44 of the Act sets out the rules applicable in default of any agreement to the contrary for the distribution of the assets on final settlement of accounts between the partners. The first rule provides for payment of losses. This rule has no application in this case. The second rule provides that the assets of the firm shall be applied in the following manner and order:
  17. "1. In paying the debts and liabilities of the firm to persons who are not partners therein:
    2. In paying to each partner rateably what is due from the firm to him for advances as distinguished from capital:
    3. In paying to each partner rateably what is due from the firm to him in respect of capital:
    4. The ultimate residue if any, shall be divided among the partners in the proportions in which the profits are divisible."
  18. The Act however recognises that winding up and discontinuance of business may not immediately follow winding up. No provision is required when the continuation of business is by agreement of the partners for the benefit of the partnership. The partnership business in such circumstances is to be treated as continuing. Where there is no such agreement, there is a limit upon the entitlement of either partner to continue the partnership business.
  19. Section 38 of the Act authorises for partners to carry on the business of the partnership after dissolution so far as this may be necessary for the beneficial winding up of the partnership and for the completion of unfinished transactions, but not otherwise. A continuing partner who carries on the business after dissolution otherwise than for this limited purpose without the consent of the outgoing partner does so without the authority of the partnership and accordingly he carries on the business on his own account and he may be held liable to account to the outgoing partner.
  20. The position in equity prior to the Act was that the continuing partner in such a situation was liable to account as a fiduciary to the outgoing partner in respect of his unauthorised use for his own benefit of the assets of the partnership. In Willett v. Blanford 1 Hare 253, 66 ER 1027 Wigram V-C held that the quantum of the entitlement of the Outgoing Partner in respect of the profits made by the Continuing Partner must be determined by reference to what is right and equitable between the parties in all the circumstances and in particular the extent that the profits are attributable to use of the outgoing partner's share of the partnership assets. In subsequent cases there was no strict uniformity in approach to what was right and equitable in all the circumstances and cases arose when it was held right and equitable to divide the profits between the parties in accordance with their contributions to the capital of the partnership: see e.g. Yates v. Finn (1880) 13 Ch D 839 ("Yates"). This approach can on occasion be seen reflected in other authorities and the text books: see Pollock's Digest of the Law of Partnership 11th edition at p.140. But the law in this regard was firmly established very much as stated by Wigram V-C in Manley v. Sartori [1927] Ch 157 ("Manley") and by Parliament in section 42 of the Act.
  21. In the case of Manley, the death of a partner dissolved a partnership, but the surviving partners continued the partnership business on their own account. The question arose as to the entitlement of the personal representatives of the deceased partner to a share of the profits earned between the death of the partner and the winding up. Romer J (at page 161-6 said:
  22. "… Where … the surviving partners, instead of realizing the assets and distributing the proceeds amongst the partners in accordance with their rights and interests, choose to carry on the business and make profits by virtue of the employment of any of the partnership assets, then, subject no doubt to making a proper allowance to the surviving partners for their trouble in so carrying on the business, such profits belong to all the persons interested in the partnership assets by means of which the profits have been earned in accordance with their rights and interests in those assets; that is to say, proportionately to their interests in those assets. That has been laid down in numerous cases and is affirmed by s. 42 of the Partnership Act of 1890…. [The] profits … were not divisible between the parties in accordance with their rights and interests in profits earned while the partnership was a going concern…. Now the rights of the deceased partner or his legal person representatives are rights over all the assets of the partnership. He has an unascertained interest in every single asset of the partnership, and it is not right to regard him as being merely entitled to a particular sum of cash ascertained from the balance-sheet of the partnership as drawn up at the date of his death…. [as] was pointed out by Wigram V-C in Willett v. Blanford, it does not necessarily follow that because the surviving partners have been carrying on the business the profits or the whole of the profits are attributable to the use of the partnership assets…. it may well be that in a particular case profits have been earned by the surviving partner, not by reason of the use of any asset of the partnership, but purely and solely by reason of the exercise of skill and diligence by the surviving partner; or it may appear that the profits have been wholly or partly earned not by reason of the use of the assets of the partnership, but by reason of the fact that the surviving partner himself provided further assets and further capital by means of which the profit has been earned. Those profits, so far as earned by sources outside the partnership assets, are not profits in which the executors of the deceased partner could be entitled to any share…. Where surviving partners continue to carry on the business, prima facie they are carrying it on by reason of their possession of the assets of the partnership; and the executors of the deceased partner are prima facie entitled to a share of the profits proportionate to his share in the assets of the partnership. It is for the surviving partners to show, if they can, that the profits have been earned wholly or partly by means other than the utilization of the partnership assets….."
  23. The law as stated by Romer J was reaffirmed, albeit obiter, by Nourse LJ in his judgment in Popat v. Shonchatra [1997] 1 WLR 1367 at 1373-4 ("Popat") with which the other members of the Court of Appeal agreed and by the Privy Council in Pathirana v. Pathirana [1967] 1 AC 233 at 240-1. The words in section 42 "share of partnership assets" means the outgoing partner's share in the proprietary ownership of assets belonging to the partnership. This construction is confirmed by the fact that, where in the Act reference is intended to be made to a partner's interest in "net assets" or the surplus of the partnership assets after satisfying the partnership liabilities, this is expressly stated: see section 41(a).
  24. The only authority to the contrary cited to me (other than Yates) is the decision of HH Judge Behrens in Taylor. In that case the learned judge held that: (1) section 42(1) of the Act provided that the outgoing partner was entitled in the alternative to a share of the profits attributable to the use of the outgoing partner's share of the partnership assets and to interest at the rate of 5% p.a. on the amount of his partnership assets; (2) in case of both alternatives the term "partnership assets" meant the same thing; (3) there is implicit in the option to take interest a requirement for a valuation of the share of the outgoing partner "by reference to section 39 and 44 of the Act"; (4) in case of exercise of the option to take a share of profits a like valuation must also implicitly be required of the outgoing partner's share; and (5) since (as a result of misappropriations of partnership assets by the outgoing partner) at the date of dissolution of the partnership the value of his share in the partnership was nil, he was not entitled to any share of the profits subsequently earned by the continuing partner. He expressed the view that this result accorded with the judgment of Romer J in Manley and he discounted the obiter view expressed by Nourse LJ in Popat as inconsistent with that of Romer J.
  25. In my respectful judgment, the reasoning of the learned judge was flawed for (amongst others) the following reasons: (1) the fact that in case of exercise of the option to take interest a valuation is implicitly required (of the outgoing partner's share of the partnership assets) does not mean that a valuation of any kind is required if the option is exercised to take a share of the profits; (2) the subject matter of the enquiry as to use and the profits attributable to use by the continuing partner is the use of the assets of the partnership and the outgoing partner's entitlement is to a share of the attributable profits reflecting his share in the ownership of those assets at the date of dissolution. Neither the value of his share in the partnership nor the sum which may be payable by the outgoing partner to the continuing partner is relevant; (3) the view expressed by the judge is not supported by the judgment of Romer J. Indeed it is inconsistent with that judgment as well as the observations to the same effect of Nourse LJ.
  26. I need only refer briefly to one other authority, namely the decision of Stringer J in De Renzy v De Renzy [1924] NZLR 1065. In that case two brothers were partners in a business. One died and the other, wrongly believing himself entitled to do so under an agreement to purchase his brother's share, made a payment to his brother's estate of the purchase price for that share which he thought to be due and thereafter treated the business as his own. The judge held that there was no such agreement to purchase and that the deceased brother's estate was entitled to the profits attributable to the share of the deceased brother in the partnership assets, but that the size of the share was to be reduced by the reason of the payment made. I find some difficulty seeing how or why the size of the share was reduced by the payment: I would have thought that the payment should rather be treated merely as on account of the sum found to be due. Whether or not that is correct, all that matters for the purposes of this action is that the judgment of Stringer J expressly reaffirms the general principle that the outgoing partner is entitled to the profits attributable to his share of the partnership assets.
  27. DECISION

  28. In my judgment the decision of the Master was plainly correct as to Mr Sandhu's entitlement to a half share of profits. It is in the circumstances common ground that he was also correct in ordering the interim payment. I accordingly dismiss the appeal.


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