England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE CHANF 95/1633/B

Royal Courts of Justice

Strand

London WC2

Wednesday, 25th June 1997

B e f o r e :

LORD JUSTICE NOURSE

LORD JUSTICE EVANS

and

SIR RALPH GIBSON

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RAJENDRA POPAT Plaintiff/Appellant

-v-

DINESH SHONCHHATRA Defendant/Respondent

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Handed Down Judgment prepared by

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MR A K SEN (instructed by Messrs Simmons, Borehamwood, Hertfordshire) appeared on behalf of the Appellant Plaintiff.

MR M BEAUMONT (instructed by Messrs Seymour Major & Co., Wealdstone, Middlesex) appeared on behalf of the Respondent Defendant.

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J U D G M E N T

(As Approved by the Court)

Crown Copyright

Wednesday, 25th June 1997

LORD JUSTICE NOURSE:

So far as is here material, section 24 of the Partnership Act 1890 provides:

"The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement express or implied between the partners, by the following rules:

(1) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses whether of capital or otherwise sustained by the firm."

The main question arising on this appeal is whether the profit realised on a sale, after dissolution, of the assets of a short-lived partnership at will is divisible equally between the partners pursuant to section 24(1) or, as has been held below, in shares corresponding to their respective shares of the capital of the partnership as at the date of dissolution. In order to answer that and other questions, it is necessary to restate basic principles as to, first, the distinction between the capital of a partnership and its assets and, second, the nature and size of a partner's share of the assets.

The appeal is by the plaintiff against part of an order made by Mr David Neuberger QC (as he then was), sitting as a deputy judge of the Chancery Division. The nature of the various matters then in dispute and the material facts are fully stated in the judge's judgment, which is reported at [1995] 1 WLR 908 and [1995] 4 All ER 646. Those reports and the narrowing of the issues in this court together make it possible for the facts to be restated relatively briefly. Many of them can be stated in the judge's own words.

The plaintiff and the defendant were in partnership together in the business of a newsagent from 29th September 1989 until 10th January 1990. The business was carried on at leasehold premises at 169, Church Lane, Kingsbury, London NW9, the lease having been assigned to the partners in joint names, together with fixtures and fittings and the goodwill of the business being carried on there, on 29th September 1989. The cost of acquiring those assets was funded as to about £60,000 by two development loans from the bank and as to the balance by contributions from the partners found by the judge to be £4,564 in the case of the plaintiff and £23,064 in the case of the defendant. He found that £2,700 of the plaintiff's contribution was funded by a loan of that amount made by the defendant to the plaintiff. He further found that the partnership was at will and that it was determined by the plaintiff on 10th January 1990. None of those findings has been in issue on this appeal. It has throughout been common ground that, during the subsistence of the partnership, profits and losses were to be respectively shared and borne by the partners equally.

After 10th January 1990 the defendant carried on the business on his own. During the first half of 1990 he entered into negotiations with the freeholder of the premises, eventually purchasing the freehold on 11th July 1990 for £80,000, of which £8,000 came from his own savings, the balance being raised by a loan from his bank secured by a mortgage of the freehold. On 10th July 1992, exactly two and a half years after the dissolution of the partnership, the premises, together with the goodwill of the business and the fixtures and fittings, were sold by the defendant for £179,750, the stock and book debts being valued at a further £7,265. It appears that the gross profit on the sale of the premises may have been of the order of £12,000.

The writ in the action was issued on 31st May 1990. By his reamended statement of claim served on 8th March 1995 the plaintiff claimed relief of a kind familiar in a partnership action, including all necessary accounts and inquiries and a declaration that the defendant held the freehold of the partnership premises or the proceeds of sale thereof on trust for himself and the plaintiff in equal shares. The trial took place over three days between 20th and 22nd March, the judge's reserved judgment being delivered on 4th April 1995. He said that it had become clear during the course of the hearing that it would be sensible for him to direct an inquiry before the master as to the basis upon which the respective entitlements of the parties should be assessed following dissolution. The purpose of his judgment was to make the appropriate findings of fact and to give directions as to the legal principles to be applied when the inquiry was carried out.

It appears that there may have been some dispute, or at any rate discussion, as to the form of the order because the matter was restored to the judge on 3rd October, being the date borne by the order, which was ultimately entered on 1st November 1995. Paragraph 1(a) contained a declaration as to the duration of the partnership "upon the terms of sharing equally the trading and capital profits and losses during the subsistence of the partnership" and as to the respective capital contributions as found by the judge. Paragraph 1(b) contained a declaration in these terms:

"Of the amount contributed by the Plaintiff towards the capital of the partnership £2,700.00 was advanced as a loan to him by the Defendant and is to be credited to the Defendant and debited from the Plaintiff upon the taking of accounts between the parties as hereinafter provided."

Paragraph 2 contained a declaration as to the dissolution of the partnership and the subsequent carrying on of the business by the defendant until it was sold on 10th July 1992. Paragraph 3 contained a declaration in these terms:

"The freehold of the premises acquired by the Defendant in July 1990 was a partnership asset belonging to the parties pro rata to their proportionate shares in the net partnership assets as at 10 January 1990 (emphasis added)."

Paragraph 4 contained a declaration that in respect of the post dissolution period the revenue profits (my emphasis) were to be apportioned between the parties in the like shares as in paragraph 3, subject to just and proper allowances to the defendant in respect of the work carried out by him in continuing the business. The first part of paragraph 5 contained a declaration in these terms:

"In respect of the capital profits of the partnership business (including the profits realised on the sale of the premises, its goodwill and fixtures and fittings) during the post dissolution period such profits are to be calculated after taking into account any contributions made by the Defendant towards the purchase of the freehold of the premises and all other costs of acquisition, and thereafter apportioned between the parties [in the like shares as in paragraph 3] ..."

Paragraph 5 further provided that to the extent that the capital profits were attributable to the defendant's work in carrying on the partnership business in the post dissolution period then to that extent they were to be apportioned between the partners subject to first allowing the defendant any shortfall in the allowances given to him under paragraph 4. Paragraphs 6 and 7 directed accounts and inquiries before the master, including inquiries as to the revenue and capital profits earned by the partnership and the allowances to be given to the defendant under paragraph 4.

The principal relief sought by the plaintiff's notice of appeal is the discharge of the declarations contained in paragraphs 3 and 5 of the judge's order and the substitution therefor of declarations that the freehold of the partnership premises and the post dissolution capital profits are held and are to be apportioned respectively between the partners in equal shares. He also seeks a discharge of the declaration contained in paragraph 1(b), so that the loan of £2,700 is not taken into account for the purpose of settling the partnership accounts between the parties. He does not seek the discharge or variation of the declaration contained in paragraph 4 relating to the post dissolution revenue profits of the business, a topic to which I will return in due course.

The relevant principles of partnership law are well settled. I start with the distinction between the capital of a partnership and its assets. As I said at first instance in Reed v. Young [1984] STC 38, 57:

"The capital of a partnership is the aggregate of the contributions made by the partners, either in cash or in kind, for the purpose of commencing or carrying on the partnership business and intended to be risked by them therein. Each contribution must be of a fixed amount. If it is in cash, it speaks for itself. If it is in kind, it must be valued at a stated amount. It is important to distinguish between the capital of a partnership, a fixed sum, on the one hand and its assets, which may vary from day to day and include everything belonging to the firm having any money value, on the other (see generally Lindley on the Law of Partnership, 14th ed. (1979), p.442)."

When that case reached the House of Lords the last sentence in the passage quoted was expressly approved (I believe that the earlier sentences were impliedly approved), by Lord Oliver of Aylmerton, with whose speech the others of their Lordships agreed; see [1986] 1 WLR 649, 654. The reference to Lindley should now be to Lindley & Banks on Partnership, 17th ed. (1995), p.497.

In the present case the judge treated the contributions of £4,564 and £23,064 made by the plaintiff and defendant respectively to the cost of acquiring the partnership assets as contributions to the capital of the partnership. In that he was right. But he proceeded from there to treat those contributions as determinative of the size of the partners' respective shares of the assets. In that he was wrong, although it must at once be said that it seems probable that his attention was not fully directed to the correct legal principles.

On 29th September 1989, when the leasehold premises, fixtures and fittings and the goodwill of the business were acquired, they became "partnership property" to be held and applied exclusively for the purposes of the partnership pursuant to section 20(1) of the 1890 Act. Although it is both customary and convenient to speak of a partner's "share" of the partnership assets, that is not a truly accurate description of his interest in them, at all events so long as the partnership is a going concern. While each partner has a proprietary interest in each and every asset, he has no entitlement to any specific asset and, in consequence, no right, without the consent of the other partners or partner, to require the whole or even a share of any particular asset to be vested in him. On dissolution the position is in substance not much different, the partnership property falling to be applied, subject to sections 40 to 43 (if and so far as applicable), in accordance with sections 39 and 44 of the 1890 Act. As part of that process, each partner in a solvent partnership is presumptively entitled to payment of what is due from the firm to him in respect of capital before division of the ultimate residue in the shares in which profits are divisible; see section 44(b) 3. and 4. It is only at that stage that a partner can accurately be said to be entitled to a share of anything, which, in the absence of agreement to the contrary, will be a share of cash.

Having dealt with the nature of a partner's share of the assets, I turn to its size. Here a start must be made with the opening words of section 24, which generate an expectation that its subsequent provisions will prescribe the entitlement, subject to any agreement, of the partners to share in the partnership property. On a further perusal, that expectation is disappointed, subsection (1) referring only to "the capital and profits of the business" and none of the other subsections being relevant. That makes it necessary to have resort to the rule, established well before the 1890 Act and no doubt recognised by section 24, that, subject to any agreement, all the partners are entitled to share equally in the partnership property. Lord Lindley's statement of the rule and his justification for it are set out and discussed in Lindley & Banks at pp. 540-542. In the present case, there having been no agreement to the contrary, the partners were entitled to share equally in the assets of the partnership.

I now revert to the capital of a partnership. It is implicit in what is said in the preceding paragraph that "capital" in section 24(1) cannot be construed so as to include the partnership property. As appears from Lindley & Banks, at pp. 500-501, this is a point which has occasioned some discussion in successive editions of that work. Lord Lindley's own view of it was:

"If it be proved that the partners contributed the capital of the partnership in unequal shares it is presumed that, in the absence of an agreement to the contrary, on a final settlement of accounts, the capital of the business remaining after the payment of outside debts and liabilities, and of what is due to each partner for advances, will, subject to all proper deductions, be divided amongst the partners in the proportions in which they contributed it and not equally."

An attempt was subsequently made to justify that apparent departure from the plain words of the provision by reading "capital" as including partnership property. However, the view of the current editor, Mr R.C. I'Anson Banks, is that "capital" should be given its normal meaning and I am in no doubt that his view is correct. Equally, I am in no doubt that the slightest indication of an implied agreement between the partners that their shares of capital should correspond with their contributions to it will suffice to displace the provision that they are entitled to share equally. That could, in most cases, be expected to be the common-sense of the matter. Clearly, Lord Lindley would have approved of that approach.

In the present case the plaintiff has not at any time suggested that he is entitled to share equally in the capital of the partnership. That no doubt is because it is clear from the witness statement of Mr Thackerar of Thackerar & Co. and the contemporary documents that when the parties were negotiating a formal partnership deed (see [1995] 1 WLR, 912E to H) it was always understood that the defendant was to be credited with the £25,000 which it was then assumed he would contribute. However that may be, the plaintiff's case on this appeal depends not on "capital" in section 24(1) but on "profits", which clearly includes capital as well as revenue profits.

Before coming to the individual elements of the judge's decision, I summarise the position by saying that at all material times the plaintiff and the defendant were entitled to share in the capital of the partnership in proportions corresponding to their respective contributions to the cost of acquiring the leasehold premises, fixtures and fittings and the goodwill of the business, but that they were entitled to share equally in the assets of the partnership. I suspect that the confusion arose out of a natural but erroneous assumption on the part of the judge that the entitlement of partners to the assets of the partnership was similar to the entitlement of shareholders of a company limited by shares to the assets of the company on a liquidation.

Of the matters to which this court must advert, the judge dealt first with the £2,700 loan made by the defendant to the plaintiff; see [1995] 1 WLR, at p. 911D to H. He decided that the loan, even if technically not a partnership item, should be credited to the defendant and debited to the plaintiff on taking the partnership accounts. That having been a matter entirely within the judge's discretion and his view an eminently sensible one, the appeal against that part of his decision, which was very properly not pressed by Mr Sen on behalf of the plaintiff, must fail.

The next matter dealt with by the judge was the revenue profits during the post dissolution period; see [1995] 1 WLR, at pp. 913E to 914B. Applying section 42(1) of the 1890 Act and Manley v. Sartori [1927] 1 Ch. 157, he decided that, subject to just and proper allowances for the defendant in respect of the work carried out by him in continuing the business, those profits should be divided between the partners in the proportions in which they were entitled to share in the assets of the partnership, by which he meant shares corresponding to their respective shares of capital. Since section 42(1) refers 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", the judge ought, for the reasons already stated, to have directed a division between the partners in equal shares. However, the plaintiff has not appealed against that part of the judge's order. That may be because little turns on the point in financial terms. The curious feature is that if paragraph 4 of the order stands as it is at present drawn, it will have the unintended effect of providing for an equal division. This is a point which must be discussed with counsel after judgment.

The judge then dealt with the capital profit made on the sale in 1992; see [1995] 1 WLR, at pp. 914E to 916F. Again he decided that those profits should be divided between the partners in the proportions in which they were entitled to share in the assets of the partnership, by which he again meant shares corresponding to their respective shares of capital. He accepted as a matter of ordinary language and in the light of Barclays Bank Trust Co. Ltd. v. Bluff [1982] Ch. 172, that section 42(1) did not apply to capital profits made during the post dissolution period. He also recognised, I think, that "profits" in section 24(1) includes capital as well as revenue profits. However, while finding it a difficult point, he said at p. 914H:

"In my judgment, section 24(1) of the Act of 1890 does not apply, because it appears to me to be dealing with the position as between partners during the period of the partnership up to the date of the dissolution of the partnership. That is supported by the fact that in relation to the income enjoyed after dissolution, section 24(1) cannot have been intended to apply, in view of the provisions of section 42(1). If section 24(1) only applies to the distribution of the revenue profit and loss up to dissolution, and not beyond dissolution, it would be inconsistent if it applied to the distribution of capital profit made after dissolution. This view appears to be consistent with the observations of Goff J in Sobell v. Boston [1975] 1 WLR 1587, 1591C-F."

I cannot agree with this reasoning of the judge. To begin with, there is nothing in the observations of Goff J in Sobell v. Boston which is of assistance in the present case. Indeed, Mr Beaumont, who has appeared for the defendant in this court, expressly disclaimed any such assistance. More significantly, there is no authority and nothing in principle to support the view that section 24(1) was only intended to apply to revenue profits up to the date of dissolution. Like all the provisions of section 24, being entirely general in its terms, it applies equally both before and after dissolution. The true view is that section 42(1) provides for an exception to the general provision made by section 24(1) only in the "certain cases" (see the marginal note) in which its requirements are satisfied.

Barclays Bank Trust Co. Ltd. v. Bluff , the decision in which was approved by the Privy Council in Chandroutie v. Gajadhar [1987] AC 147, 154, is indeed authority for the proposition that post dissolution capital profits cannot properly be regarded as profits within the meaning of section 42(1); see [1982] Ch., at pp. 181F to 183B. It follows that the partners here are entitled to share equally in the post dissolution capital profits, in this instance not because they are divisible in the shares in which they are entitled to share in the assets of the partnership, but because they are covered by the general provision in section 24(1). That is enough to dispose of this point in favour of the plaintiff and it is unnecessary to consider the further reasoning of the judge. I would only add that, so far as this point is concerned, the present case has much in common with Robinson v. Ashton (1875) 20 Eq. 25, a decision of Sir George Jessel MR, which was not cited in argument either here or below.

The plaintiff also complains of the judge's decision to make an allowance out of the capital profits equivalent to any shortfall in the allowances given to the defendant under paragraph 4 of the order. That was another matter within the judge's discretion. Provided, as paragraph 5 requires, that the defendant can show that the capital profits were attributable to his work in carrying on the partnership business in the post dissolution period, there can be nothing unjust or inequitable in allowing any shortfall under paragraph 4 to be taken out of the capital profit before division. I would therefore affirm the judge's decision on that point.

Finally, the judge dealt with the purchase of the freehold of the partnership premises; see [1995] 1 WLR, at pp. 916G to 917C. Applying the decision of Sir John Pennycuick V-C in Thompson's Trustee in Bankruptcy v. Heaton [1974] 1 WLR 605, he held that the defendant held the freehold in trust for the partners in the proportions in which they were entitled to share in the assets, by which he again meant shares corresponding to their respective shares of capital. Again, for the reasons already stated, he ought to have held that the freehold was held in trust for the partners in equal shares. On that point also the plaintiff is entitled to succeed.

I would therefore allow the appeal to the extent of discharging the declarations contained in paragraphs 3 and the first part of paragraph 5 of the judge's order (but not the second part of paragraph 5) and substituting therefor declarations that the freehold of the partnership premises and the post dissolution capital profits are held and are to be apportioned respectively between the plaintiff and the defendant in equal shares. The declaration made in paragraph 4 will be discussed with counsel after judgment.

LORD JUSTICE EVANS:

I agree.

SIR RALPH GIBSON:

I also agree that the appeal should be allowed to the extent and for the reasons stated by Lord Justice Nourse.

Order: appeal allowed in part and judge's order amended accordingly; appellant plaintiff awarded four-fifths of his costs of the appeal and legal aid taxation.